Practical Guide: How to Choose the Type of Action That Fits Your Investment Strategy

When you decide to venture into stock markets, one of the most critical decisions is understanding what categories of stocks exist and which one best fits your financial goals. Not all stocks perform the same or offer the same benefits. The right choice will depend on your risk profile, time horizon, and performance expectations.

Why is it crucial to understand the structure of equity securities?

When you acquire a stock, you are buying a share of a company’s equity capital. This automatically makes you a shareholder, granting you economic rights and, in some cases, the right to participate in corporate decisions. However, not all stocks give you the same rights.

The reality is that the prices of these securities fluctuate mainly due to the law of supply and demand. When the company prospers, prices rise; when it faces difficulties, they fall. Your profit or loss as an investor will depend on the purchase price and the selling price, plus any dividends received during the holding period.

It is essential to know that some stocks are publicly traded on the stock exchange, while others are not. The stocks you see on trading platforms do not necessarily represent 100% of the company but a fraction available to the investing public.

The three most traded types of stocks in stock markets

Common stocks: the classic option for long-term gains

Common stocks are the most common and abundant type you’ll find on any stock exchange. Companies issue them as a financing tool, thus avoiding bank loans.

Advantages they offer:

Your investment grants you voting rights at corporate meetings. The more shares you own, the greater your decision-making power over the company’s direction. Additionally, you participate in profit sharing proportionally to your shareholding. As long as the company operates, your securities remain valid without an expiration date.

Risks and disadvantages:

Prices are highly volatile and can fluctuate significantly. If the company goes bankrupt, your investment could become worthless. Moreover, selling these stocks is more complicated than other options, as it requires finding a buyer and completing specific documentation procedures.

Preferred stocks: predictable income without decision-making control

These stocks operate similarly to common stocks but with a crucial difference: you do not have voting rights in company decisions.

In exchange, you receive guaranteed economic benefits: a fixed dividend payment, regardless of how the business performs. This means your return is assured. In the event of company liquidation, investors holding preferred securities are reimbursed before common shareholders.

This type of stock is ideal for those seeking to generate passive income without involvement in corporate management. Liquidity is also higher: you can sell your position quickly and obtain cash with fewer complications.

An important consideration: if the company earns extraordinary profits, common shareholders will receive higher benefits because their dividends increase, while preferred shareholders maintain fixed returns.

Privileged stocks: the best of both worlds

Privileged stocks combine features of the previous two: you have voting rights (as in common stocks) and access to fixed dividends (as in preferred stocks). However, their issuance requires majority approval from the shareholders’ meeting.

Other classifications of stocks you should know

Beyond the main division, there are other ways to categorize these securities:

By holder:

• Registered: issued in the name of a specific person
• Bearer: the physical holder of the security is the owner

By stock exchange listing:

• Listed: traded on regulated public markets
• Private: typically small and medium-sized companies, outside the exchange

Other relevant categories:

Redeemable stocks have a limited term; after the established period, they expire.

Short-selling stocks allow for bearish investing: you sell borrowed securities expecting prices to fall so you can buy them back cheaper and keep the profit.

Own stocks are those the company holds of itself. When a company repurchases its own securities, it is generally a positive signal: indicating management believes the price is undervalued.

Comparative table: understanding key differences

Practical cases: how they have performed in reality

Let’s take Microsoft stocks during the second quarter of 2022 as an example:

Purchase scenario (July 2022):

The month started at $254.84 USD and closed at $277.64 USD. An investor who bought one share would have gained $22.80 USD. If they had invested in two shares, the profit would have been $45.60 USD. From this gain, commissions and overnight financing charges should be deducted. However, they would not have received dividends in July, as Microsoft distributes them starting August 17.

Short sale scenario (August 2022):

The month opened at $275.36 USD and closed at $260.51 USD, a drop of $14.85 USD. Investors operating in short (betting on the decline) would have gained this difference, while those with long positions would have lost.

These examples illustrate why it is crucial to choose the correct strategy based on your market expectations.

Investment mechanisms: how to access each type of stock

Listed stocks and short selling: the most practical option

If you trade through an online broker, buying and selling listed stocks is straightforward. You only need to:

• Open an account on a trading platform
• Place buy or sell orders
• Define the size of your position

For short operations, the broker automatically lends you the securities. You sell at the current price, wait for it to fall, buy back at a lower price, return the borrowed shares, and keep the profit.

Private common stocks: a more bureaucratic process

If you want to invest in common stocks of private or small companies, the process is more complex:

• You need complete documentation
• A formal contract must be signed
• If you sell, it requires legal endorsement and documentation procedures

In return, if your investment is significant, you will have greater rights in corporate decisions and profit sharing.

Preferred and privileged stocks: restricted access

To invest in preferred stocks, you usually need approval from the shareholders’ meeting. Privileged stocks are even more restricted and are only available in large companies with complex shareholding structures.

Own stocks: only for owners

You can only invest in own stocks if you run or own a company. Small firms can issue private shares; large firms issue own stocks that the company keeps in treasury.

Selection strategy based on your investor profile

For conservative investors: preferred stocks are your best option. They offer predictable returns and guaranteed liquidity without the management complications.

For long-term investors: common stocks of solid companies can generate exponential gains through price appreciation and accumulated dividends. It requires patience and in-depth analysis.

For active traders: listed stocks offer maximum liquidity and operational ease. You can buy and sell while the market is open without restrictions.

For speculators: short operations allow quick gains in bearish markets, though they carry very high risk.

Key conclusions for your investment decision

Choosing the type of stock should be based on thorough analysis of the company, your time horizon, and risk tolerance. Stock markets tend to rise gradually over long periods, but declines are often abrupt and concentrated in a few weeks.

If you invest traditionally, you must accept that exiting the market will not be instant; high demand is needed. With trading, flexibility is maximum: you can practically execute operations without restrictions during market hours.

Remember that short selling is risky, but profits can be faster. Long operations (traditional buying) offer greater security but require more time to materialize. The key is to align the type of stock with your personal strategy.