Practical Guide: What Types of Stocks Exist and How to Choose the Best for Your Portfolio

When you decide to enter the stock markets, one of the first things you need to determine is which financial instruments make up your portfolio. Not all stocks perform the same, nor do they offer the same benefits. Some securities give you voting power in the company, others guarantee fixed dividends, and some move in the opposite direction of the market. The question is: which one truly fits your strategy?

Understanding Stocks in the Stock Market

Stocks are more than just numbers on a screen. When you acquire one, you become a partial owner of the company. This means you participate in its profits through dividends and, depending on the type of stock, also in its strategic decisions.

Not every stock you see on a trading platform represents 100% of a company’s available shares. There are publicly traded stocks and others that remain privately held. The important thing is to understand that the value of your investment fluctuates based on two factors: business performance and the law of supply and demand.

If the company prospers, the price rises. If it faces difficulties, it declines. Your profit or loss will depend on the difference between your purchase price and the selling price, plus the dividends you collect along the way.

Main Types of Stocks Available in the Market

There are multiple ways to classify stocks, but three categories dominate the stock market and are the most relevant for investors.

Common Stocks: The Classic Choice for Investors

These are the most common and traditional type. Companies issue them to finance themselves without resorting to bank debt, and investors buy them expecting long-term profitability.

The attractive part is that you have voting rights at shareholder meetings. The more shares you own, the greater influence you have on the company’s future decisions. You also receive dividends proportional to your stake.

The risky side is that these dividends vary depending on how well the company performs. They are volatile, difficult to sell quickly, and if the organization goes bankrupt, your investment could become worthless. That’s why they are recommended for investors who can afford to wait years.

Preferred Stocks: Predictable Passive Income

Here, you exchange voting power for financial security. You cannot vote on business decisions, but in return, you receive guaranteed dividends regardless of the company’s performance.

When there are profits, the distribution favors preferred shareholders first, then common shareholders. If the company becomes insolvent, preferred shareholders have priority in recovering their investment.

They are perfect if you seek to generate passive income without worrying about how the company operates. Additionally, they have better liquidity: you can sell your position easily and quickly recover cash. The trade-off is that if the company takes off with exponential profitability, common shareholders get the biggest gains while you remain with fixed dividends.

Privileged Stocks: The Best of Both Worlds

These combine features of common and preferred stocks: you have voting rights and receive guaranteed economic benefits. But their issuance requires majority approval from the shareholders’ assembly.

Other Relevant Classifications

Beyond the main three, there are other categories based on their nature:

Registered vs. Bearer: The first are issued in the name of a specific holder; the second belong to whoever physically holds the certificate.

Publicly Traded vs. Private: Public stocks are freely traded on stock exchanges; private ones typically belong to small and medium-sized companies.

Redeemable: They have a predetermined maturity date. After that period, they cease to exist and lose validity.

Short Selling: Tools to profit from falling prices. The broker “lends” you the stock, you sell it, and hope it drops so you can buy it back cheaper and pocket the difference.

Treasury Shares: Stocks repurchased by the company itself. When a company buys them back, it usually indicates it believes its price is undervalued—a bullish signal for other investors.

Comparative Table: Key Features

How to Invest in Each Type of Stock

Your strategy varies depending on the type you choose.

For publicly traded common stocks, you simply need a broker that facilitates buy and sell orders. It’s quick and liquid. If Microsoft rises from $254 to $277 USD (as happened in July 2022), with a lot of 1 share, you gain $23 USD. With 2 lots, $46 USD. Additionally, if you hold the position long enough, you will receive dividends according to the company’s calendar.

For traditional OTC common stocks, you will need legal documentation, contracts, and endorsements. It’s tedious and slow. But if your investment is significant, you will have more influence on business decisions and better distributions.

For preferred stocks, the process is similar to common stocks, but with less regulatory complexity. Your goal is passive income, not control.

For privileged stocks, approval from the existing investor board is required. It’s not accessible to everyone.

For treasury shares, it’s only possible if you manage or own the company.

For short selling, it’s the easiest operationally. The broker lends you the stock, you sell it expecting it to fall. If Microsoft dropped from $275 to $260 USD in August 2022, short sellers earned $15 USD per lot. When you close the position by buying at the lowest price, your profit is secured. The risk is theoretically unlimited if the price rises uncontrollably.

The Key Point: Choose According to Your Horizon

Different types of stocks respond to different profiles. If you are patient and trust in long-term business growth, publicly traded common stocks are your path. If you prefer security and predictable cash flow, preferred stocks are waiting for you.

Aggressive investors resort to short selling when they detect bubbles. Conservative shareholders sleep peacefully with stocks of solid companies. Founders and controlling investors look for common stocks with voting power.

The most important thing is to conduct a thorough analysis of the company before committing capital. In trading, you have the flexibility to enter and exit frequently. In traditional investing, expect long periods without quick exits. Both strategies work—the difference lies in your risk profile, available capital, and patience.