Practical Guide: Understand Each Type of Stock and Maximize Your Investment Strategy

When you decide to enter the stock markets, one of the first steps is understanding that there are multiple classes of shares available. Not all offer the same rights, risks, or profitability. Your decision on which type of securities to acquire will directly determine your exposure to risk and the potential benefits you will obtain.

Shares represent fractions of a company’s capital. By purchasing one, you automatically become a shareholder. However, your decision-making power, voting rights, and profit participation will depend entirely on the class of shares you hold.

▶ What are shares really in the stock market?

Shares function as certificates of partial ownership of a company. When you invest capital in them, you acquire both benefits and associated risks. The dividends you receive and the gains or losses will depend on the initial purchase price versus the final sale price, movements governed by the law of supply and demand.

It is important to distinguish: not all shares issued by a company are listed on a stock exchange. Those that are listed are available for trading through trading platforms. Majority shareholders generally have greater influence on business decisions and access to privileged information.

▶ The three main classes of shares you should master

Common or ordinary shares: The classic of the markets

This is the most abundant class of shares in stock markets. They are issued by companies as an alternative financing method, avoiding traditional bank debt.

Owners of common shares enjoy voting rights at corporate assemblies. Those with a larger number of shares have more decision-making power. They also receive dividends proportional to their shareholding.

The risk here is higher: prices fluctuate significantly based on company performance, showing greater volatility and being more difficult to sell quickly. If the company goes bankrupt, your investment becomes zero. However, they offer exponential long-term growth potential.

Preferred shares: Security over control

This class of shares does not grant voting rights but offers attractive compensations: fixed dividends guaranteed regardless of company performance. Your return is protected.

In the event of company liquidation, holders of preferred shares are reimbursed before common shareholders. This makes them safer. Additionally, they are easy to sell, providing greater liquidity.

The counterpoint: if the company prospers exponentially, your return remains the same fixed amount, while common shareholders receive larger gains. Ideal for those seeking predictable passive income.

Privileged shares: The best of both worlds

They combine features of both previous types. They grant voting rights and economic benefits of preferred shares but require shareholder approval for issuance.

▶ Other classes of shares and their specific characteristics

Registered vs bearer shares: The former are issued in the name of a specific holder with formal registration. The latter belong to whoever physically holds the certificate.

Publicly traded vs private shares: Publicly traded shares are freely negotiable on the stock exchange with high liquidity. Private shares generally belong to small and medium-sized enterprises without public access.

Redeemable shares: Have a defined term. After the established period, they cease to exist and lose rights and obligations.

Short-selling shares: Allow for betting on a decline. The investor “borrows” the share from the broker, sells it expecting the price to fall, and then repurchases it at a lower cost to close the position.

Treasury shares: Reacquired by the same company. Their existence indicates that the company believes its securities are undervalued, betting on future appreciation.

▶ Comparative matrix: Key differences between classes of shares

The second classification compares registered, publicly traded, redeemable, short-selling, and treasury shares:

▶ Practical examples: How different classes of shares operate

To illustrate how these classes of shares work in practice, let’s take the case of Microsoft over two consecutive months.

In July 2022 (bullish month), the stock opened at 254.84 USD and closed at 277.64 USD. The low was 245.70 and the high 281.60. An investor with 1 lot would have gained 22.80 USD; with 2 lots, 45.60 USD. Commissions and overnight swaps should be deducted. If the position was held until after August 17 (Microsoft dividend payout date), additional dividends would have been received.

In August of the same year, traders who used short-selling also gained. The price opened at 275.36 USD and closed at 260.51 USD, representing a 14.85 USD profit for short positions. Simultaneously, the dividend payout on August 17 was positive for buyers and negative for short sellers.

This example demonstrates how different classes of shares and operational strategies offer alternative opportunities depending on the expected market direction.

▶ Investment strategies based on the chosen class of shares

For common shares: Require formal documentation, contracts, and legal endorsements. You need to find a genuine buyer when selling. If your position is significant, you gain influence in business decisions. Ideal for long-term investment with patience.

For preferred and privileged shares: Require approval from investor meetings but provide a quicker exit from the market. Better suited for conservative profiles.

For publicly traded and short-selling shares: Operable directly through brokers. You place buy or sell orders, and the intermediary manages everything. Maximum flexibility for active traders. Buying and selling are unrestricted while markets are open.

For treasury shares: Only accessible if you run a company. Indicate internal confidence in valuation.

▶ Analysis before investing in any class of shares

Conduct thorough research on the company: balance sheets, quarterly results, sector trends, competitive position.

If planning traditional investment, be aware of low liquidity: high demand is needed to sell. With trading, buying and selling are almost instantaneous.

Remember: shares tend to appreciate over time. Markets rise slowly over long periods but fall sharply within weeks. Short-term investing is quick but very risky. Choose the class of shares aligned with your risk profile, time horizon, and profitability objectives.