Complete Guide to Stock Action Categories for Traders

Fundamentals: What Do Shares Represent in Stock Markets

Before delving into investment strategies, it is crucial to understand the nature of the assets you will trade. Shares constitute portions of a company’s share capital, and by acquiring them, you automatically become a shareholder owner of the organization. Not all shares of a company are listed on the open market; many remain under private control.

The relationship between the shareholder and the company generates specific rights and obligations depending on the class of security you hold. While some shareholders hold decisive voting power at meetings, others enjoy only fixed economic returns. The value of your investment will fluctuate as the company gains or loses market position, determined by the fundamental law of supply and demand.

Two factors generate returns for the investor: dividends distributed from company profits and gains or losses derived from the difference between purchase and sale prices. This latter aspect explains why some prefer short-term operations while others hold positions for years.

The three main classifications of shares on the stock exchange

Ordinary Shares: the classic long-term instrument

They represent the most conventional form of corporate financing. These shares grant voting rights at ordinary meetings, where shareholders with the largest number of shares exert greater influence over strategic decisions of the company.

Profit sharing is distributed proportionally to the size of the shareholding. The securities remain valid indefinitely as long as the company continues operating. However, this modality presents considerable volatility and limited liquidity compared to other options. The risk is substantial: if the organization goes bankrupt, the investment is completely lost. Trading requires finding interested buyers and completing extensive documentation procedures.

Preferred Shares: passive income with guaranteed security

Although they lack voting rights, they offer compensation through predetermined fixed yields. Regardless of business performance, holders of these securities receive their assured returns. In cases of corporate bankruptcy, preferred investors have access to reimbursements before ordinary shareholders.

The payment schedule establishes a clear hierarchy: first, preferred dividends are distributed, then ordinary ones. This structure attracts investors seeking stability without participating in company management, and selling is notably easier and faster than with ordinary securities. However, when the company prospers significantly, ordinary shareholders capture the greatest gains through increased dividends and revaluation of their positions.

Privileged Shares: the balance between two worlds

They function as a hybrid of the previous modalities, combining voting rights with fixed economic benefits characteristic of preferred shares. Their implementation requires majority approval from the shareholders’ meeting.

Secondary categories based on specific characteristics

The classification of share types extends beyond the three main categories. Some securities differ by their legal structure: registered shares are issued in the name of a specific holder, while bearer shares belong to whoever physically possesses the document.

Private shares typically belong to small and medium-sized companies without public listing. Listed on stock exchanges, on the other hand, allow smooth trading in regulated markets with maximum liquidity. Redeemable shares operate under a predefined timeframe, after which they lose validity. Short-selling shares allow bets on declines, expecting drops in quotation. Finally, treasury shares remain in the company’s treasury and are never transferred to external investors.

Comparative analysis of main features

Listed shares and short-selling shares exhibit opposite market dynamics but share maximum operational practicality. Brokers facilitate all procedures: the trader simply places buy or sell orders defining volume. With ordinary shares, complexity increases exponentially; extensive documentation, contract signing, and, in case of sale, a willing buyer to complete legal procedures are required.

Practical strategies for investing in each modality

Stock shares offer considerable liquidity, enabling agile transactions. Consider an illustrative case: during July 2022, shares of a major tech company opened at 254.84 USD and closed at 277.64 USD, generating a profit of 22.80 USD per unit (or 45.60 USD trading two units). The data show the minimum at 245.70 and maximum at 281.60 during that period.

This same example reveals the opposite: in August 2022, the same share opened at 275.36 USD and closed at 260.51 USD. Short-term traders captured 14.85 USD profit while long-term buyers faced equivalent losses. Dividends paid on August 17 benefited buying positions and penalized selling positions.

Traditional operations in ordinary shares require owning the security before selling it, completing extensive documentation procedures, and finding genuine buyers. In contrast, trading allows “lending” shares through brokers: you sell borrowed securities, wait for a price drop, buy back the equivalent amount, and close the operation. This mechanic greatly simplifies transactions.

Common shares require formal contracting and substantial documentation; significant investments grant greater decision-making power and profit participation. Preferred and privileged shares require approval from investor assemblies. Treasury shares can only be traded if you manage or own the company.

In general, equity securities tend to appreciate over time. Analysts and traders seek to capitalize on both upward movements (buying) and sharp declines (selling short). Execution requires deep research into the company’s financial health, competitiveness, and prospects. Stock markets tend to rise slowly over extended periods but experience concentrated drops over weeks or months. Short selling generates quick profits but involves substantial risk; it requires precise timing and rigorous position management.