Essential Guide: Discover the Types of Stocks You Need to Know to Invest Successfully

When you decide to venture into the stock markets, a fundamental question arises: which are the stocks you should really consider for your investment strategy. The answer is not unique, as there are multiple classifications of equity instruments, each with different characteristics, benefits, and risks that can determine whether your capital generates gains or losses.

Understanding what stocks are exactly

Stocks represent fractions of a company’s share capital. By purchasing a stock, you automatically become a shareholder and owner of a portion of that organization. Not all stocks available on trading platforms constitute 100% of the company’s assets, which means there are shareholders with greater influence in corporate decisions.

The value of your stocks fluctuates according to the company’s performance. If the company increases its market value, the quotes rise; during difficult periods, they decline. Your profit or loss as an investor will depend on the price at which you bought and sold, with these movements mainly driven by supply and demand in the market.

What are the main categories of stocks in the market

Although there are numerous classifications, we will focus on the three that dominate stock trading:

Common stocks: the classic of investment

They are the most common in financial markets. Companies issue them as a financing mechanism, avoiding debt with banking institutions.

Their advantages include voting rights in corporate assemblies (with greater power for those who own more shares) and participation in profit distributions. The owner maintains their status as long as the company operates, with no expiration date.

However, they present higher volatility, are difficult to sell, and carry high risk: if the company goes bankrupt, your investment becomes zero. They are intended for long-term returns, requiring contracts and legal procedures to prove the relationship between the holder and their shareholding.

Preferred stocks: stability over control

Similar to common stocks but without voting rights. Their strength lies in fixed dividend payments: regardless of the company’s direction, investors are assured of their returns.

When the company generates profits, preferred dividends are paid first, followed by common dividends. In case of bankruptcy, preferred shareholders receive priority reimbursements.

They are ideal for those seeking passive income without intervening in business decisions. Their liquidity is higher: selling positions is quick and easy. The downside: if the company performs exceptionally well, the higher returns go to common shareholders.

Privileged stocks: the best of both worlds

Combine features of common and preferred stocks: they grant voting rights and economic benefits of preferred stocks, requiring majority approval from the shareholders’ assembly.

Other important classifications

Registered stocks: Issued in the name of a specific holder.

Bearer stocks: The physical holder of the certificate is the owner.

Private stocks: Not traded on the stock exchange, generally belonging to small and medium-sized companies.

Listed stocks: Negotiable on stock markets with ease.

Redeemable stocks: Defined under a specific timeframe, expire after a certain period.

Short stocks: Allow for short selling, expecting price declines to profit.

Treasury stocks: Owned by the company itself, never sold to investors. When a company repurchases its own shares, it generally indicates that its management considers the current price very low.

Visual comparison of main types

Operating stocks: from theory to practice

Real example of bullish operation:

In July 2022, a hypothetical stock opened at 254.84 USD and closed at 277.64 USD. With a lot of 1, you would have gained 22.80 USD; with 2 lots, 45.60 USD. After deducting commissions and overnight swap, the actual profit would be lower. If you held the position until the dividend payout date, it would have generated additional income.

Operating downward with short stocks:

August of the same year: opening at 275.36 USD, closing at 260.51 USD. Short investors earned 14.85 USD per lot. Buyers lost. The dividend payout on August 17 benefited buyers and harmed short sellers.

Investment strategies according to each type

For common stocks

Require extensive documentation and legal contracts. Selling is complicated, needing to find interested buyers and execute the corresponding procedures. If your investment is large, you gain greater decision-making rights and better profit sharing, but also more responsibilities.

For preferred stocks

The process is more straightforward. Trading platforms facilitate buying and selling without additional documentation. Perfect for those seeking stable returns without managerial intervention.

For short stocks

Highly speculative. The broker “lends” the stock: you sell it, benefit from the decline, and when you close the position by executing a buy order of equivalent size, you return the loan. Requires rigorous technical analysis.

For treasury stocks

Only accessible if you run a company. If small, you create private stocks; if large, you manage corporate treasury stocks.

Profitability and risk outlook

Historically, stock values tend to increase in the long term. However:

• Traders seek short-term gains operating during market hours
• Traditional investors bet on gradual appreciation over years

Both require deep fundamental analysis of target companies. Short-term investing is particularly risky: although markets rise slowly over extended periods, declines tend to be abrupt and concentrated in days or weeks.

The key is to know exactly which stocks align with your risk profile, time horizon, and financial goals. Each category serves different purposes in a diversified portfolio.