Practical Guide: How to Choose and Trade Different Categories of Stocks in the Stock Markets

The Starting Point: Understanding What Represents a Share

When you acquire a share, you are buying a fraction of a company’s capital. This automatically makes you a partial owner of that organization, with specific rights and obligations that vary depending on the type of security you hold. Not all shares held by a person carry the same weight or generate the same benefits—everything depends on the classification of the financial instrument you have selected.

It is important to clarify that on trading platforms, only a portion of each company’s total shares are circulating. The rest remains in the hands of majority shareholders or founders. When market prices rise, all your positions increase in value; when they fall, the opposite occurs. This movement is primarily driven by the law of supply and demand, although corporate results, geopolitical decisions, and market sentiment also influence it.

The Three Main Categories Dominating the Market

Common Shares: The Risk-Return Bet

Common shares are the most traditional type and represent the majority of trading volume on any stock exchange. Companies issue them as a way to obtain financing without resorting to bank debt.

As a holder of common shares, you have voting power at corporate assemblies— the more shares you own, the greater your influence on strategic decisions. You also receive dividends, although their amount varies according to the company’s results. The key benefit is that they have no expiration date: they are yours as long as the company remains operational.

However, the risk is considerable. Prices fluctuate noticeably, selling can be complicated if the market is closed or liquidity is low, and if the company goes bankrupt, your investment becomes worthless. These shares are designed for long-term investors who can tolerate volatility.

Preferred Shares: Fixed Income Without Voting Control

These function as a hybrid between debt and equity. They do not grant voting rights but guarantee a fixed dividend regardless of company performance. The company always pays these dividends before those of common shares.

For those seeking to generate passive income without being involved in corporate decisions, they are an attractive option. Additionally, they are more liquid than ordinary shares—you can sell them quickly and recover cash without cumbersome procedures. In case of bankruptcy, preferred shareholders have priority in reimbursements over common shareholders.

The counterpoint: if the company’s profits surge, common shareholders will see their investment multiply while you continue receiving the same fixed dividend. The profitability ceiling is predictable but limited.

Privileged Shares: The Best of Both Worlds (Almost)

They combine voting rights of common shares with fixed dividends of preferred shares. Their issuance requires majority approval from the shareholders’ assembly, making them less common. They offer an interesting balance for those who desire both participation and stability.

Other Classifications Based on Specific Characteristics

Beyond the previous three, there are other relevant categories:

Registered vs. Bearer: Registered shares are recorded in the name of a specific owner with documentary requirements. Bearer shares belong to whoever physically holds the security.

Publicly Traded vs. Private: Publicly traded shares are negotiated on stock exchanges publicly. Private shares typically belong to small and medium-sized enterprises, without public access.

Redeemable: They have a defined term. Upon maturity, they automatically disappear and lose rights and obligations.

Short-Selling Shares: Allow bets on a decline. The broker “lends” you the share, you sell it expecting a price drop, and then buy it back at a lower price. The risk is theoretical and unlimited if prices rise.

Treasury Shares: The company repurchases its own shares. When a company invests in its own shares, it generally indicates that management believes the current price is undervalued—a bullish signal for other investors.

How They Operate in Practice: The Microsoft Case

Let’s take a real example. In July 2022, Microsoft traded between 245.70 USD (minimum) and 281.60 USD (maximum), closing at 277.64 USD after opening at 254.84 USD. An operator who bought at the start of the month and sold at the close would have gained 22.80 USD per share (with lot size of 1). With a lot size of 2, the profit would have been 45.60 USD, minus commissions and overnight swap.

However, Microsoft distributed dividends on August 17. Anyone holding open positions before that date would have received dividends; short sellers would have paid dividends instead of receiving them.

In August, the scenario reversed: Microsoft opened at 275.36 USD and closed at 260.51 USD. Short sellers gained 14.85 USD per share while buyers lost. The dividends on August 17 again favored buyers and penalized short sellers.

Trading Mechanics: How Brokers Operate

In traditional trading, to sell a share, you need to own it. But in current stock markets, brokers introduce a different mechanic: they “lend” you the share, you sell it, benefit from price drops, and when you close the position, you buy back the same amount to return the loan. No one ends up with extra shares; the trade simply disappears from the system.

This structure democratizes access. You don’t need complex documentation or endorsement contracts like in private investments. Just specify the quantity, price, and order type (buy, sell, stop-loss), and the broker executes.

Comparison of Main Features

Strategy According to Your Investor Profile

If you seek quick returns and can tolerate volatility, listed common shares are your tool. Buy when you detect oversold conditions, sell on overbought signals, collect dividends if timing allows.

If you prefer generating predictable income, consider preferred shares. The trade-off is clear: lower profit potential but much less stress.

If you are a beginner, start with listed shares of large companies (Microsoft, Apple, Tesla). They are more liquid, have fewer regulatory surprises, and fundamental data is public and abundant.

Avoid short-selling until you have real experience. Profits are faster during market declines, but the risk is disproportionate if the market surprises you with a bullish rally.

And forget about private, redeemable, or treasury shares unless you run a company. Administrative complexity does not compensate for minor investors.

Conclusion: Time to Decide

The stock market tends to rise slowly over years but crashes abruptly within weeks. Ordinary shares capture both dynamics. Preferred shares soften declines but lose explosiveness during rallies.

Before investing real capital, thoroughly analyze the company, its competitors, profit margins, and debt. If you choose the traditional path (buy and hold long-term individual shares), be prepared for low liquidity and documentary procedures. If you opt for trading, take advantage of the ease of buying and selling while markets are open.

The key is to align the type of share with your time horizon, risk tolerance, and cash flow needs. There is no “correct” category—only the one that best fits your context.