Stock Investment Strategy: Understand the main types of stocks to maximize your capital

Investing in the stock market is not a matter of luck, but of understanding. Before putting your money into any financial instrument, you need to know exactly what type of stock you are buying and what rights, risks, and benefits it entails. The reality of the stock market is that there are multiple categories of stocks, each with very different characteristics that can lead to exponential gains or significant losses.

Why does choosing the right type of stock matter?

A stock is fundamentally a share of a company’s equity. When you acquire one, you automatically become a shareholder and owner of a part of that company. However, not all stocks offer the same rights or guarantee the same returns.

The price of a stock fluctuates according to the law of supply and demand. When the company prospers and its market value increases, prices go up. During difficult periods, they go down. Your profit or loss depends on two key variables: the purchase price and the sale price. Additionally, there is the potential to receive dividends if the company distributes profits.

The three main categories dominated by the market

Common Stocks: Profitability with Control

Common or ordinary stocks are the most traditional type issued by companies. They represent a financing strategy that many organizations prefer over borrowing from banks.

If you own common stocks, you have voting rights at corporate assemblies. Your influence on decisions is proportional to your number of shares: more positions mean greater influence. You also have the right to dividends, again in proportion to your shareholding.

The contract is indefinite: you will be the owner as long as the company exists and operates, with no expiration date. These securities are conceived for long-term returns, with formalized contracts and documentation that establish the relationship.

The risky side is that they show considerable volatility. Prices fluctuate widely, selling them can be complicated, and if the company goes bankrupt, your investment becomes zero. They are ideal for investors seeking active participation.

Preferred Stocks: Predictable income without decision-making power

Preferred stocks operate under a different logic. You do not have voting rights in corporate decisions, but in exchange, you receive more secure economic benefits.

The main attraction is the guaranteed fixed dividend. Regardless of how the company performs, your capital return is assured. When the organization makes profits, preferred dividends are paid first, before common stock dividends. If the company goes bankrupt, you have priority in reimbursements over common shareholders.

They are perfect for those seeking passive income without involvement in management. They are easily bought and sold, allowing quick liquidation of positions. However, if the company prospers extraordinarily, the higher benefits go to common shareholders with higher variable dividends. Preferred stocks stick to their predictable yields.

Privileged Stocks: The best of both worlds

Privileged stocks combine features of the previous two. They grant voting rights and typical economic benefits of preferred stocks, but require approval from the shareholders’ assembly to be issued. They are less common but offer an interesting balance.

Other examples of less known but important stocks

Beyond these three main categories, the market offers interesting variations:

Registered: Issued in the name of a specific owner formally identified.

Bearer: The physical holder of the security is automatically the owner, without the need for formal registration.

Private: Not traded on a public exchange. Typically belong to small and medium-sized companies with limited investors.

Listed on the stock exchange: Negotiable in public stock markets with ease of buying and selling.

Redeemable: Exist under a defined period. After that term, they cease to exist and rights and obligations are lost.

Short: Allow for short selling. You expect prices to fall to profit when you buy back at a lower price.

Own: Owned by the same company that issued them. When a company repurchases its own shares, it is generally a positive signal: indicating that executives believe the current price is undervalued.

Quick comparison: Choosing your best option

Common stocks offer high volatility with potential for exponential gains, voting rights, but complicate selling and carry high risk.

Preferred stocks provide fixed dividends, easy liquidity, very low risk, but no decision-making power and limited gains if the company takes off.

Privileged stocks balance both with voting rights and guaranteed dividends, though they are more difficult to access.

Examples of stocks listed on the stock exchange multiply daily: Microsoft, Apple, Tesla, and thousands more enable instant trading. Short selling opens reverse strategies. Own stocks indicate corporate confidence in future prospects.

How they operate in practice: From theory to real results

Imagine investing in a tech company’s stocks during a bullish month. The price opens at 254 USD and closes at 277 USD, generating a 23 USD profit per share purchased. With two shares, you would have earned 46 USD before commissions.

If the company paid dividends during that period, you would receive them automatically. Public information on payout calendars is available for strategic consultation.

The next month, if prices fall from 275 USD to 260 USD, a short seller would gain 15 USD per share sold. Here, whether you receive or pay dividends depends on your position.

The difference between traditional investing and trading

If you want to invest traditionally in common stocks, you will need formal documentation, contracts, and legal procedures. The process is slow but provides real rights. Selling them requires finding an interested buyer and executing new procedures.

In contrast, with a broker offering stocks listed on the exchange, everything is instant. You place buy or sell orders, define your volume, and that’s it. Brokers handle all the operations.

For short selling, the broker literally “lends” you the stock so you can sell it, expecting to buy it back later at a lower price. You close the operation when you repurchase that same volume.

Privileged stocks require approval from the investors’ meeting. You can only buy a company’s own stocks if you manage that company.

Analysis before committing capital

Whether you seek short-term or long-term profitability, thoroughly research the target company. Review its balance sheets, historical profits, projections, and competitive position.

If you opt for traditional common stocks, prepare for a slow entry and exit process. If you prefer trading listed stocks, you will have maximum flexibility while markets are open.

Short strategies generate quick gains but with high risk. Stock markets typically rise slowly over long periods, but when they fall, they do so abruptly in weeks. That volatility is your opportunity or your trap.

With clear knowledge of each type of stock and their dynamics, your investment is based on solid fundamentals rather than blind speculation.