Stock Market Actions: Complete Guide to Types and How to Choose Yours According to Your Profile

If you’re thinking about investing in stocks, the first thing you need to understand is that not all stocks are the same. There are different types of stocks in the stock market, and each has different characteristics, benefits, and risks that will directly impact your gains or losses. Here’s everything you need to know to make smarter decisions.

What are stocks really?

Stocks are fragments of a company’s share capital. When you buy one, you automatically become a shareholder and owner of a portion of that company. This means you participate in its profits (dividends), and also share its risks if things don’t go well.

The important thing is to understand that when a company’s value rises in the market, the price of its stocks also increases. The opposite happens when it faces difficulties. Your profit or loss will mainly depend on two factors: the price at which you bought the stock and the price at which you sold it, both driven by the law of supply and demand.

The 3 main types of stocks in the stock market

Common stocks: for those seeking maximum growth

They are the most traditional and common in markets. As a holder of a common stock, you gain voting rights in corporate decisions (greater power if you own more shares) and access to profit sharing proportionally.

The benefit is clear: if the company grows, your earnings can be exponential. The risk is also there: if it goes bankrupt, your investment becomes zero. Dividends are variable and depend on the company’s performance. Additionally, they have no expiration date as long as the company exists.

The downside is that selling these securities can be complicated if you can’t find a buyer, and they tend to be more volatile.

Preferred stocks: guaranteed passive income

Here, the trade-off is different. You don’t have voting rights, but in exchange, you receive fixed dividends regardless of how the company performs. It’s money that enters regularly, with no surprises.

In case of bankruptcy, investors with preferred stocks are reimbursed before common stockholders. This makes them safer and less risky. Selling is easy and quick, providing liquidity.

The downside: if the company takes off and generates extraordinary profits, the benefits of common stocks will be much higher. Preferred stocks stick with their fixed returns.

Privileged stocks: the best of both worlds

Combine features of common and preferred stocks: you have voting rights and receive fixed dividends. However, they require approval from the shareholders’ assembly to be issued, so they are less common in the market.

Other types of stocks you should know

Registered vs. bearer stocks: Registered stocks are in a specific person’s name, while bearer stocks are owned by whoever physically holds the certificate.

Public vs. private stocks: Public stocks are traded on the exchange and are easy to buy and sell. Private stocks generally belong to small and medium-sized companies.

Redeemable stocks: Have a defined term. After that time, they cease to exist and lose all rights.

Short-selling stocks: Used for bearish investing. The broker “lends” you the stock so you can sell it, hoping the price will fall and you can buy it back cheaper to return.

Treasury stocks: Belong to the issuing company. When a company repurchases its own shares, it is generally a positive signal: they believe the shares are undervalued.

Quick comparison between main types

Practical example: how to make money with stocks

Let’s imagine that in July 2022, Microsoft opened at 254.84 USD and closed at 277.64 USD. A trader who bought 1 share would have gained 22.80 USD that month. With 2 shares, they would have doubled the profit to 45.60 USD (minus commissions).

The following month, in August, Microsoft dropped from 275.36 USD to 260.51 USD. This is where short trading comes in: someone who sold short would have gained 14.85 USD, while those who bought lost.

This is why there are both bullish and bearish strategies in the stock markets.

Which type of stocks is right for you?

It all depends on your goal and risk capacity:

• If you seek long-term growth and are willing to accept volatility: common stocks.
• If you prefer regular and predictable income: preferred stocks.
• If you actively trade and have access to a broker: publicly traded or short-selling stocks.
• If you need flexibility and speed: stocks that are easily traded on the exchange.

The key is to conduct thorough analysis of the company before investing. In trading, you can enter and exit quickly while markets are open. In traditional investing, you will need documentation and legal procedures, so make sure you truly want to be in that position long-term.

Remember: stocks historically rise over time, but drops can be abrupt. Always invest with money you can afford to lose.