Ordinary or Preferred? Understand the differences between ON, PN, and Units before investing

If you are just starting in the stock market, you probably face a fundamental question: what type of stock should you choose? The answer is not as simple as it seems. When we talk about common or preferred shares, we are facing two distinct paths with completely different characteristics, rights, and benefits. And there is a third path: Units, which combine the best (or worst) of both worlds.

This practical guide will demystify these categories in an uncomplicated way, providing a real understanding of how each functions in the market and which one best fits your investor profile.

What exactly is a stock?

Before diving into the categories, let’s go to the basics: a stock is nothing more than a piece of a company. When you buy a stock, you become a partner in that company, even if it’s a very small one.

Companies sell these “crumbs” of their capital to raise money. This money funds projects, expands operations, invests in research – in short, moves the business forward.

For the investor, stocks open two profit doors: appreciation (if the company grows, your stock becomes more expensive) and dividends (the company can share profits with you).

But stocks are not the same as other investments. Fixed income securities, for example, promise predictable gains. Stocks? They are unpredictable. They can yield a lot or a little. They can rise or plummet. That’s why they are called “variable income.”

The big difference lies in the rights you gain. As a shareholder, depending on the type of stock you hold, you have voting rights in company decisions. Those investing in bonds do not have this power. And when it comes to receiving dividends, shareholders of different stock types may have different priorities – and that is exactly why categories exist.

Common Stocks (ON): voting power is in your hands

Common stock (ON) is for those who want an active voice in the company. End of story.

When you hold ON, you have the right to attend general meetings and vote on important decisions: who will be the president, how profits will be spent, whether the company will merge or not. The more ON shares you have, the more voting power you exercise.

In Brazil, common stocks always end with “3” in their trading code. PETR3 is common, VALE3 is common, ITUB3 is common. Easy to identify.

The rights that come with a common stock are:

Voting at meetings: The main feature. You influence company decisions. But honestly? A small investor will hardly influence anything alone. You need many shares to have real weight.

Dividends: Yes, you receive them. But they have no priority. If the company has limited profits to distribute and must choose between paying common and preferred stocks, preferred stocks get paid first.

Subscription rights: If the company issues new shares, you have the right to buy first, maintaining your percentage stake in the company.

Bonuses: Sometimes the company distributes new shares instead of cash. The more shares you had before, the more you receive.

Pros and cons of common stocks

If you want to influence decisions meaningfully, common stocks are attractive. You have real voting power and can follow strategic decisions. If the company prospers, your stock rises along with it. Simple as that.

But there are pitfalls. Common stocks are as volatile as any other stock – the market fluctuates, and you can lose money. Also, dividends are not guaranteed. The company can make a lot of money and decide to reinvest everything instead of paying shareholders. And generally, common stocks have less liquidity in the market – it’s harder to find someone to buy than with preferred stocks.

Real examples of common stocks you know:

• Petrobras (PETR3): Brazil’s largest oil company
• Vale (VALE3): one of the largest mining companies in the world
• Itaú Unibanco (ITUB3): Brazil’s largest private bank

For those willing to take on variable income risk and want some voice in the company, common stocks can make sense. But it requires real commitment to understanding the company.

Preferred Stocks (PN): priority in dividends, no voting

Now we have the other side: preferred stocks (PN).

With a PN, you give up voting rights (or have very limited voting) in exchange for absolute priority in dividends. If the company has limited profits to distribute, preferred shareholders get paid first. Common shareholders get what’s left.

Many companies establish a fixed percentage of extra dividends for preferred stocks. Banco Santander Brasil, for example, always pays 10% more in dividends to those holding PN (SANB4) than to those with ON (SANB3).

Preferred stocks end with “4” or “5” on the stock exchange. PETR4, SANB4, BBDC4 – you can identify them easily.

The specific rights of preferred stocks are:

Priority in dividends: If the company has limited money to distribute, preferred shareholders get paid first. It’s real protection.

Priority in reimbursement: If the company goes bankrupt and is liquidated, preferred shareholders get their money back first.

Restricted or no voting rights: You do not vote or only vote in very specific situations.

Subscription and bonuses: Just like common stocks, you have the right to buy new shares before others and receive bonuses.

Pros and cons of preferred stocks

The main attraction of preferred stocks is dividend security. If you seek regular income, PN is more reliable than ON. Also, preferred stocks tend to have more liquidity in the market – it’s easier to buy and sell because more people are trading.

The obvious disadvantage? Zero voting power (in most cases). If the company makes a bad decision and you disagree, you can do nothing but sell your shares.

Examples of preferred stocks in Brazil:

• Petrobras (PETR4): the same oil company, but in preferred version
• Bradesco (BBDC4): second largest private bank
• Gerdau (GGBR4): one of Latin America’s largest steelmakers

If you want more predictable dividend flow and don’t mind no voting rights, preferred stocks are safer.

Units: the combo package of stocks

There is a third path few beginners know: Units. Think of them as a closed package that combines both common and preferred stocks of the same company in a single transaction.

Suppose Santander creates a Unit with 1 common (SANB3) + 4 preferred (SANB4). When you buy the (SANB11) Unit, you are purchasing the entire package at once. Automatic, without needing to trade each stock individually.

Since Units combine both types, you gain simultaneously: voting rights (from the common) and priority in dividends (from the preferred). It’s like having the best of both worlds in one asset.

Pros and cons of Units

The biggest benefit? Instant diversification. With one transaction, you get exposure to different classes of stocks. No need to think, no need to calculate proportions – it comes ready.

In some cases, Units have more liquidity than individual stocks, especially if the common stock has low trading volume. Sometimes, the Unit is the safest way to invest in that company.

But there are limitations. You do not choose the proportion – it’s as the company decided. If you think the ratio is bad for your goals, too bad, you take the whole package or nothing. And in some cases, if you want to convert the Unit into separate stocks later, there may be costs involved.

Examples of Units in the Brazilian market:

• Santander (SANB11): 1 common + 4 preferred
• Klabin (KLBN11): 1 common + 4 preferred
• Sanepar (SAPR11): 1 common + 4 preferred

Units make sense if you want simplicity and balanced exposure.

How to choose between common, preferred, or Unit?

Here’s a practical decision map:

Choose Common if:

• You want to influence company decisions
• You have time and knowledge to follow meetings
• You are willing to take on variable income risk
• You believe the company will grow significantly

Choose Preferred if:

• You seek more stable dividend income
• You don’t want to deal with meetings or voting
• You prefer market liquidity
• You want protection in case of financial problems

Choose Unit if:

• You want simplicity in one transaction
• You seek a balance between voting and dividends
• The Unit has liquidity and makes sense for your goal
• You don’t want to calculate ideal proportions

The truth? Most beginner investors don’t need to choose among them as if they were rivals. You can have a portfolio with common stocks of companies you believe will grow, preferred stocks of established companies paying good dividends, and maybe a Unit or two for diversification.

The Tag Along right: your protection when everything changes

Regardless of which type you choose, there is a very important mechanism that few investors know: the Tag Along.

Imagine you are a minority shareholder. A major investor comes and offers a fortune to buy control of the company. You weren’t consulted. The controlling shareholders sell and exit. And now? You are left with a company that can change management, strategy, everything.

Tag Along is your right to “follow” this sale. If the controlling shareholders sell their shares at a certain price, you have the right to sell yours at the same price and under the same conditions. It’s protection against being unfairly harmed.

For example, Companhia de Transmissão de Energia Elétrica Paulista (TRPL3) offers 80% Tag Along for common stocks and 0% for preferred stocks. That means: if the company is sold, those with ON can get 80% of the purchase price. Those with PN are completely unprotected – no protection.

When choosing a stock, always check the Tag Along percentage. Sometimes this information saves you from a trap.

Conclusion: common or preferred stocks? It depends on you

Stocks are real fractions of a company’s capital. They work differently from other investments because they bring actual business participation. Within the stock universe, you have distinct categories – common with voting rights, preferred with priority in dividends, and Units that combine both.

There is no “right” universal choice. There is the right choice for you, based on your investor profile, how much risk you can handle, whether you want active participation or just dividends, your investment horizon.

The secret? Deeply understanding each category, studying the specific company behind them, and aligning your strategy with your real objectives. Common or preferred stocks, each has its place in a well-constructed portfolio.