Understand the Difference Between Common Stock, Preferred Stock, and Units on the Brazilian Stock Exchange

In the Brazilian capital markets, investors face fundamental choices about which type of security to acquire. Each modality – common shares and preferred shares, in addition to Units – offers a distinct set of rights, obligations, and potential returns. For those seeking a voice in company decisions, common shares may be the way; for those prioritizing profitability and dividend security, preferred shares stand out; and for those wanting both in a single transaction, there are Units. This guide will unravel these three categories and help you align each with your investor profile.

Units: The Complete Investment Package in Stocks

Let’s start with the concept that blends the best features of two worlds. A Unit is simply a deposit certificate combining multiple shares of the same company into a single tradable asset. In practice, when you acquire a Unit, you are buying a “package” – for example, one common share combined with four preferred shares – in a single operation, without needing to fragment the purchase.

This structure allows the investor to obtain, simultaneously, voting rights (via common component) and dividend preference (via preferred component). The ratio varies according to what each company defines in its bylaws.

Brazilian companies often resort to Units to expand their access to the investor market. Santander (SANB11), Klabin (KLBN11), and Sanepar (SAPR11) are clear examples of this practice. Each of these Units follows a specific composition, enabling diversification through a single transaction.

The main advantage? Simplicity. Instead of building a portfolio with different securities, the investor can achieve balanced exposure in a single move. Liquidity can also be higher, especially when individual common and preferred shares suffer from low trading volume. The disadvantage lies in rigidity: you cannot choose the proportion between ON and PN, as it is already pre-defined.

Common Shares: Voting Power and Corporate Influence

Common shares (ON) confer to their owner the most valuable right in the equity universe: voting at general meetings. This feature makes the common shareholder an active participant in the company’s strategic decisions.

In the Brazilian market, common shares are identified by the digit “3” at the end of the ticker (PETR3 of Petrobras, VALE3 of Vale, ITUB3 of Itaú Unibanco). The greater the number of common shares you hold, the more influence you will have in voting.

Rights Guaranteed to Common Shareholders

Voting power: Direct participation in corporate decisions, with influence proportional to the number of shares owned. This fundamentally differentiates common shares from other fixed-income instruments, where the investor has no voice.

Dividend receipt: Like any shareholder, the holder of ON receives a share of distributed profits, though without priority over preferred shareholders.

Subscription rights: When the company issues new shares, common shareholders have preemptive rights to purchase, preserving their percentage stake in the company.

Bonuses: The company can remunerate shareholders through distribution of new shares, proportional to what each already owns.

When to Choose Common Shares?

Common shares are ideal for investors who want active participation, who deeply believe in the company’s management, or who have significant capital to influence decisions. However, they require more knowledge and willingness to follow votes and meetings.

The risk is similar to any stock: market volatility, variable returns depending on company performance, and uncertain dividends. To have real influence, it is necessary to accumulate a robust position, which demands considerable capital.

Preferred Shares: Profitability with Dividend Security

Preferred shares (PN) invert the logic of corporate participation. In exchange for giving up (or significantly restricting) voting rights, the preferred shareholder gains clear financial advantages.

In the Brazilian stock exchange, preferred shares are designated with “4” or “5” in the code (PETR4 for Petrobras, SANB4 for Santander). The term “preferred” arises precisely because these securities confer priority in dividend payments.

Main Characteristics of Preferred Shares

Priority in dividends: The company commits to distributing fixed or minimum dividends to preferred shareholders, often in higher amounts than common shares. For example, Santander Brasil distributes 10% more dividends to its PN compared to ON.

Priority in reimbursement: In case of liquidation or bankruptcy, preferred shareholders receive their capital back before any other creditors, except those with guarantees.

Voting restriction: Usually, they do not have voting rights, or such rights are exercised only under very specific circumstances defined in the bylaws.

Subscription and bonuses: They retain the same rights as common shares in these aspects – preference in new issues and proportional receipt of bonuses.

Who is PN Suitable For?

Preferred shares attract investors seeking consistent profitability through dividends, who are less inclined to monitor corporate decisions, or who prefer to reduce risk by focusing on predictable returns. They generally have higher liquidity than common shares, facilitating entry and exit.

Examples of companies offering PN include Bradesco (BBDC4), Gerdau (GGBR4), and Petrobras (PETR4). Each has different dividend policies, making individual analysis essential.

Practical Comparison: Common and Preferred Shares in Real Context

To assist in decision-making, see how these securities behave according to your investor profile:

Tag Along: The Protector of Minority Shareholders

A crucial concept often overlooked is Tag Along – a mechanism regulated by the Law of Corporations that protects minority shareholders in control sales.

Imagine this scenario: you hold 5% of a company’s shares, and a buyer offers the controllers R$ 50 per share. Without Tag Along, you would be forced to sell at the market price you can get. With this right, you can sell your shares under the same conditions offered to controlling shareholders.

Tag Along is not uniform: it varies according to the type of share and the company. For example, Companhia de Transmissão de Energia Elétrica Paulista (TRPL3) offers 80% Tag Along for common shares but 0% for preferred shares. This means preferred shareholders in that company would be completely unprotected in a control sale scenario.

This right is fundamental in your decision between common and preferred shares, as it affects your security as a minority investor.

The Role of Shares in the Investment Universe

Shares represent fractions of the share capital and allow investors to participate directly in business growth. They differ substantially from fixed-income securities: they offer variable returns, property rights, and more pronounced market risks.

Companies use share issuance to raise funds, expand operations, finance R&D, and other growth initiatives. For the investor, they represent an opportunity for profit through appreciation and/or dividend receipt.

Building Your Strategy: Between ON, PN, and Units

Choosing between common and preferred shares (or opting for Units) should not be an impulsive decision. Consider:

Your investment horizon: Short-term favors liquidity (PN and Units often mature better). Long-term allows accumulating common shares for future influence.

Your available capital: With smaller amounts, Units offer instant diversification. With substantial capital, building your own portfolio of ON and PN may be more advantageous.

Your risk profile: Conservative? Preferred shares with a history of dividends are more suitable. Aggressive? Common shares of growth-potential companies may generate higher returns.

Your governance interest: Want to influence company decisions? Common shares are mandatory. Prefer to receive returns without engagement? Preferred is your choice.

Conclusion: Navigating the Brazilian Stock Market

Common and preferred shares, as well as Units, coexist in the market because they serve different investor needs. ON offers corporate voice; PN guarantees predictable profitability; Units combine both.

Deeply studying each modality, understanding each company’s specific structure, reviewing historical dividend policies, and confirming protections like Tag Along are essential steps before any investment.

The Brazilian stock market offers real opportunities for patrimonial growth but requires prior knowledge for assertive decisions. With clear information about common, preferred, and hybrid structures, you are better prepared to build a strategy aligned with your financial goals.