Complete Guide: Common Stocks, Preferred Stocks, and Units – Which to Choose?

In the stock market, investors face multiple options that go beyond simply buying and selling. Understanding the distinctions between common and preferred shares, as well as Units, is essential to building an investment strategy aligned with your goals. This text demystifies each category, presenting their characteristics, rights, and limitations so you can make more informed decisions.

The Fundamentals: What are shares?

[Shares]( represent fractions of a company’s share capital. When you invest in shares, you become a partner in the company – the larger your stake, the more influence you have. Corporations issue shares to raise financial resources intended to expand business, invest in research, or finance strategic projects.

From the investor’s perspective, shares offer two forms of gain: appreciation of the price (when the company prospers) and dividends (a portion of profits distributed to shareholders). Unlike fixed-income securities, which provide predefined returns, the performance of shares varies according to the company’s financial health and business performance.

Rights, Risks, and Opportunities

Being a shareholder entails specific rights. You have voting power at general meetings (depending on the type of share) and receive dividends according to the company’s distribution policy. However, shares are variable income investments – your returns can be significant or negative, subject to market fluctuations.

Compared to other financial instruments, shares stand out for their liquidity on stock exchanges. A shareholder can convert their position into cash relatively quickly, whereas some long-term securities require more time to sell.

Common Shares (ON): The Power of Decision

Common shares grant the owner voting rights at general meetings. This feature makes them special for those who want to influence corporate decisions. In the Brazilian market, they are identified by the ending digit “3” in the trading code (PETR3, VALE3, ITUB3).

Shareholder Rights of Common Shares

Voting at meetings: The greater your stake in common shares, the more influence you have in the company’s deliberations.

Receiving dividends: Like any shareholder, you are entitled to a share of the distributed profits, respecting the policy set by management.

Subscription rights: When issuing new shares, the company offers priority to common shareholders to maintain their proportion of ownership.

Bonuses: The company may distribute new shares to shareholders according to their previous stake, increasing their quotas at no additional cost.

Advantages and Limitations

The main advantage is active participation in decisions. However, exerting significant influence requires a considerable volume of shares. Like all variable income investments, they are subject to volatility and potential losses. Dividends also vary according to the company’s performance – there is no guarantee of fixed distribution as with fixed-income instruments.

Preferred Shares (PN): Financial Priority

Preferred shares prioritize financial returns over voting power. They often do not confer voting rights or do so in a limited manner. In return, they guarantee priority in receiving dividends and capital reimbursement in case of liquidation.

In Brazil, they are identified by the code “4” or “5” (PETR4, SANB4, BBDC4). Many corporate statutes establish an additional dividend percentage for preferred shares. For example, Banco Santander Brasil distributes 10% more dividends to preferred shareholders compared to common ones.

Specific Rights

Dividend preference: If profits are insufficient for the entire shareholder base, preferred shareholders are paid first.

Priority in reimbursement: In liquidation scenarios, preferred shareholders recover their investments before others.

Restricted voting rights: Depending on the statute, they may vote only in specific situations or have no voting rights at all.

Subscription and bonuses: Like common shareholders, they participate in these operations in proportion to their holdings.

Positive and Negative Points

Financial security is the main attraction of preferred shares. Many investors prefer liquidity and predictability over political influence within the company. Frequently, preferred shares have higher liquidity on the stock exchange than their counterparts. The disadvantage lies in the lack of voting rights – you do not influence strategic directions, which can be detrimental in decisions impacting the investment’s value.

Units: The Hybrid Package

Units function as certificates combining common and preferred shares into a single asset. A typical Unit may include one common share and four preferred shares. By acquiring a Unit, the investor gains exposure to both categories without needing separate transactions.

This hybrid structure incorporates features of both types: voting rights (via ON shares) and financial priority (via PN shares). The specific ratio varies as defined by the issuing company.

Advantages of the Units Structure

Simplified diversification: With a single transaction, you access different classes of shares.

Potential liquidity: In companies where common shares trade infrequently, Units can offer higher transaction volume.

Combined access: You enjoy simultaneously voting rights and preferential financial benefits.

Limitations

Inflexibility is the main disadvantage. The investor does not choose the ratio between ON and PN – this composition is rigidly set by the company. Additionally, converting Units into individual shares may involve operational costs.

Practical examples in the market: Santander (SANB11) offers 1 common share + 4 preferred shares per Unit. Klabin (KLBN11) follows a similar structure. Sanepar (SAPR11) also uses this model.

Decision Comparison: ON vs PN vs Units

To choose the most suitable category, consider your investor profile and objectives:

Common Shares are ideal for those seeking active influence in management and willing to accept volatility. They have lower liquidity but offer decision-making power.

Preferred Shares suit investors focused on stability and predictable financial returns. They generally have higher liquidity and priority in dividends, compensating for the lack of voting rights.

Units work best for those seeking balanced exposure without operational complications. They are particularly useful when individual shares have low trading volume.

Tag Along: The Minority Shareholder’s Protection Network

The Tag Along is a right that protects minority shareholders in the event of a control sale of the company. If the controllers sell their shares at a certain price, minority shareholders have the right to “follow” the transaction under the same conditions.

This mechanism prevents new managers from reorganizing the company in a way that harms minority partners. Suppose you disagree with the change of control – Tag Along guarantees the opportunity to exit without suffering unfair losses.

However, not all common and preferred shares offer 100% protection. The Companhia de Transmissão de Energia Elétrica Paulista (TRPL3) provides only 80% Tag Along for common shares and 0% for preferred. This exposes preferred shareholders to considerable risks in control change scenarios.

Final Considerations

Common and preferred shares represent different paths within the same corporate ecosystem. While ON shares offer voice and vote, PN shares prioritize financial returns. Units combine these features into convenient packages for investors seeking simplicity.

The choice among these categories should consider your investment horizon, risk tolerance, and financial objectives. Long-term and growth-focused investors may prefer common shares. Those seeking passive income and security tend to favor preferred shares. Units serve as a balanced alternative when liquidity of individual categories is limited.

Deeply understanding these instruments – including protection mechanisms like Tag Along – is essential to align investment strategies with the growth you aim for. The stock market rewards those who study, plan, and decide clearly.