I just reviewed again how the stock market works, and I’m surprised at how many people still don’t fully understand the different types of stocks that exist. This is crucial if you really want to invest wisely and not go in blind.

Look, when you talk about stocks on the exchange, not all are the same. There are important variations that determine what rights you have, how much you can earn, and what your risk level is. I’d say understanding the types of stocks is the first thing you should do before putting money anywhere.

Essentially, a stock is a small share of a company's capital. When you buy one, you automatically become a shareholder, an owner of a piece of that company. Of course, some shareholders have more influence than others depending on how many shares they hold. The interesting part is that when the company grows, your stocks are worth more. If the company faces problems, the opposite happens.

Now, among the most traded types of stocks, we have common or ordinary stocks. These are the classic ones issued by companies, allowing investors to participate in decisions through voting at meetings, and giving you the right to dividends based on your stake. The risk here is high because if the company goes bankrupt, your investment becomes worthless. Profits can be exponential, but so can losses.

Then there are preferred stocks. Here, the game changes a bit. You don’t have voting rights, but in exchange, you receive fixed dividends regardless of how the company performs. It’s safer. If the company does poorly, preferred shareholders get paid first. It’s ideal if you want passive income without getting involved in business decisions.

There’s also a hybrid type called privileged stocks that combines the best of both: you have voting rights and economic benefits like preferred stocks, although it requires approval from the assembly.

There are also other classifications based on the holder. Registered stocks are in the name of a specific person. Bearer stocks are owned by whoever physically holds the certificate. Private stocks don’t trade on the stock exchange, usually from small and medium-sized companies. Redeemable stocks have an expiration date and then cease to exist. Short-selling stocks allow betting on the decline, expecting prices to fall.

If we compare types of stocks, common stocks offer voting but extreme volatility. Preferred stocks provide stability but without decision-making power. Privileged stocks are the middle ground. Each type of stock has its purpose.

To invest properly, you need to know that stocks listed on the exchange are the most liquid; you can buy and sell easily through a broker. For example, Microsoft’s stock in July 2022 went from $254.84 to $277.64 that month. If you traded short in August when it dropped to $260.51, you also made a profit.

The key difference is that with traditional trading, you need documentation and legal procedures to sell, whereas with stocks traded on the exchange, it’s instant. In short selling, the broker lends you the stock, you sell it, and hope the price drops so you can buy it back cheaper.

My advice is to understand well the types of stocks you’re going to trade. If you’re looking for long-term investment, common stocks might be your option if you believe in the company. If you want security, preferred stocks are more predictable. And if you do active trading, any stock listed on the exchange will work as long as you have a reliable broker. The important thing is not to invest without knowing exactly what type of stocks you’re buying and what to expect from them.