What Are The Types Of Stocks? Everything You Need To Know To Trade On The Stock Market

If you plan to enter the world of stock market investing, understanding the variety of instruments available is your first step toward smarter decisions. Not all stocks perform the same, nor do they offer the same benefits. Each category has characteristics that make them more or less suitable depending on your investor profile and financial goals. In this guide, you will discover how these securities are classified and what you should consider before investing your capital.

▶ Understanding the Foundations: What Exactly Are Stocks?

When you buy a stock, you acquire a share of a company’s equity. It is not debt, but shared ownership. This means you become a partner in the organization in proportion to your stake, giving you the right to benefit from its growth and, unfortunately, also from its losses.

Stocks as financial instruments offer dual income streams: gains from price appreciation (when the value rises and you sell) and profit distributions (dividends). However, it is crucial to know that only a fraction of a company’s total capital is available for public trading on stock exchanges. The rest remains in the hands of founders, majority shareholders, or falls under other non-tradable categories.

Your final profitability will depend on two main factors: the purchase price and the selling price. These prices fluctuate mainly due to supply and demand dynamics, where corporate performance, sector outlooks, and overall market sentiment act as driving forces.

▶ The Three Main Categories Dominating Markets

Common Stocks: The Workhorse

They are the most common and favored by companies to raise financing. Owning them grants you two fundamental rights: voting at corporate meetings (with voting power proportional to your number of shares) and participation in profit sharing.

The appeal lies in their potential for exponential growth. If the company prospers, your shares can multiply. The challenge is that they also carry the maximum risk: if the company goes bankrupt, your investment disappears completely. The prices of these stocks tend to be volatile, they have lower liquidity compared to other instruments, and selling them requires more administrative procedures.

They are designed for patient investors thinking in long-term horizons, where compound growth and dividend accumulation work in your favor.

Preferred Stocks: Security with Less Control

Here, the trade-off is clear: you give up voting rights in corporate decisions in exchange for financial certainty. You receive fixed dividends paid regardless of whether the company had spectacular or difficult years.

The payment schedule prioritizes these stocks: preferred shareholders are paid first, and only after that is the remaining distributed to common shareholders. In case of corporate insolvency, they also have priority in reimbursements.

They are the ideal option for those seeking predictable income without involvement in business management. Liquidity is higher because investors can enter and exit quickly. The downside: when the company experiences a boom, your returns remain fixed while common shareholders take extraordinary gains.

Preferred Shares: The Best of Both Worlds

They combine voting rights (like common stocks) with guaranteed dividends (like preferred stocks), but require special approval from the shareholders’ meeting to be issued. They are less common but represent a balanced alternative.

▶ Secondary Classifications You Should Know

Beyond the three main categories, there are other types based on different criteria:

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

Publicly Traded vs. Private: Publicly traded stocks are negotiated on stock exchanges with very high liquidity. Private stocks generally belong to small and medium-sized companies without access to public markets.

Redeemable: Have a defined term. Upon expiration, they cease to exist and the rights are extinguished.

Short Selling: Allow betting on the decline. The broker lends the stock, you sell it expecting to buy it back cheaper later. If your prediction is correct, you profit; if wrong, losses can be significant.

Treasury Shares: Shares that the company repurchases from its own capital. Their repurchase usually indicates that management considers the price too low, which is often a positive internal confidence signal.

▶ Practical Comparison Between Types

The main difference lies in volatility versus certainty. Common stocks offer higher potential returns but with elevated risk. Preferred stocks prioritize stability over explosive gains. Publicly traded stocks facilitate quick entry and exit, while private stocks demand greater long-term commitment.

A registered stock can be either common or preferred simultaneously. A stock traded on the exchange can be bought long or sold short. These categories are not mutually exclusive but complementary across different dimensions.

▶ How to Profit in Practice: Lessons from Microsoft

Suppose in July 2022 you bought Microsoft shares at USD 254.84. The month closed at USD 277.64, representing a gain of USD 22.80 per share (approximately 8.9%). If you traded 2 lots, you would have doubled that gain to USD 45.60 before commissions and overnight fees.

The interesting part: although you made money on that move, you did not capture dividends because Microsoft did not pay distributions until August. You had to wait.

Now, if in August prices fell from USD 275.36 to USD 260.51, what happens? A short seller would have gained USD 14.85 per share, while a long position holder would have lost that amount. But there is a crucial detail: the dividend payment on August 17 benefits the long position holder and harms the short seller (must offset that distribution).

This example demonstrates that strategy matters. Quick gains in short selling exist but require perfect timing and stress tolerance. Gains from traditional buying are slower but allow dividend accumulation.

▶ Investment Routes According to Your Profile

Traditional Common Stocks: Require formal documentation, legal contracts, and endorsements. Selling them is complicated because you need to find a willing buyer to handle all procedures. Ideal for institutional or long-term investors who do not plan to exit soon.

Publicly Traded Stocks (Regular Buy/Sell): Simplified operation. Your broker handles all legal processes. You buy and sell with a click while markets are open. This is the most popular route for retail traders.

Short Selling Stocks: Technically, the broker lends the stock, you sell immediately, wait for the price to fall, buy back, and return. Profit = difference. High risk because if the price rises indefinitely, your losses are theoretically unlimited.

Preferred Stocks: Require approval from the board. Less accessible to the average investor.

Treasury Shares: Not accessible unless you run or own the company.

▶ Key Points Before Acting

Stock markets historically rise slowly over extended periods but fall sharply within weeks. This favors short sellers during crises but benefits buyers during recoveries.

Conduct thorough fundamental analysis: balance sheets, cash flows, growth projections, competitive position. Do not invest in what you do not understand.

Dividends are real but not guaranteed; they depend on corporate profitability and management decisions.

Liquidity varies greatly by category. Not all stocks can be sold instantly.

Risk is inherent. Diversify, do not concentrate everything in one security, and only invest what you can afford to lose without affecting your financial stability.

With this knowledge structure, you are better prepared to choose which types of stocks align with your goals, time horizon, and risk appetite.