Everyone who has ever invested or considered investing in stocks has had to ask themselves the same fundamental questions:
- What is the best type of action for my needs?
- What differentiates the main types of shares?
- Will the type of stock chosen have a considerable impact on returns, or is company performance the most important factor?
To begin answering such questions, we need to learn to identify the two main types of shares, ordinary and preferred , and the fundamental characteristics that differentiate them.
Common and Preferred Shares
What differentiates these two types of shares, which are designated by the abbreviations ON and PN, are two basic aspects:
- Common shares give investors the right to vote in shareholder meetings, but they represent greater risks. Small shareholders, however, do not benefit as much from voting rights, since the weight of the vote is proportional to the number of shares the shareholder holds (as a rule, one share entitles the holder to one vote in a publicly traded company’s shareholder meeting).
- Preferred shares give the shareholder the right to receive dividends from the company preferentially, that is, with priority over other investors in the company holding common shares. However, the investor cannot vote in the company’s general and extraordinary meetings and cannot influence decisions that could change the company’s future.
Dividend issue
Shareholders of common stock receive variable dividends and have no guarantee of receiving them, which makes this type of investment somewhat riskier.
Preferred shares, on the other hand, guarantee shareholders the receipt of permanent fixed dividends .
Dividends can be portions of a company’s profits distributed to shareholders as remuneration after the end of the fiscal year (the twelve-month period during which the company must prepare its financial statements). They can be paid in various ways:
- Money
- Actions
- Property rights
An important aspect of national legislation is that publicly traded companies are required to pay at least 25% of their net profit in dividends to shareholders, and this amount may be even higher depending on the company’s policy. Therefore, the more shares an investor owns, the more dividends they should receive.
Greater risk in common stocks
In general, common stock represents a higher risk for the investor.
One example is that, if the company goes bankrupt, shareholders with common stock will only receive any value after creditors and preferred stockholders have been paid.
Furthermore, as already mentioned, shareholders with preferred shares have priority in receiving dividends.
On the other hand, this type of action ends up generating higher returns for investors, balancing the risk.
An example of this higher return is that these shareholders are entitled to what is called tag-along rights, which is a premium in the event of a sale or change of control of the company.
If this occurs, the acquiring company must pay ordinary shareholders at least 80% of the share price as a kind of bonus, and this amount can reach 100%.
In general, common shares tend to appreciate more than preferred shares, especially when there is a possibility of a change in company control, which is relatively common in the case of publicly traded companies.
In addition to this type of situation, common stock also tends to appreciate more in the case of company capital growth, providing higher returns.
Shareholders’ meetings
Shareholder meetings address issues that concern their interests and ultimately determine the company’s stance on strategic matters.
The shareholders’ meeting is the highest decision-making body of a publicly traded company, positioned above the company’s own board of directors and management board.
There are two types of shareholder meetings that bring together shareholders with voting rights, that is, holders of common shares:
- Ordinary general meetings, which take place annually and focus on the most important and essential issues for shareholders and for the company’s financial and strategic performance;
- Extraordinary general meetings, on the other hand, can be called at any time of the year and address more urgent and specific issues that require a quick response to safeguard the interests of shareholders and the financial health of the company.
Finally, there are also special meetings that can be called by shareholders who hold preferred shares. Their purpose is basically to protect the interests of shareholders who have opted for this type of share.
Other types of actions
Although most shares traded on the market belong to the two main categories, common and preferred, there is also a category that includes preferred shares of different classes.
These actions can be customized by the company, meaning there are no very well-defined parameters for the 4 classes of preferred shares.
According to financial consultant Vitor Palazzo, who holds a master’s degree in finance from FEA-USP, this type of share is often used by common shareholders as a way to raise capital without having to pay interest on loans , thus avoiding resorting to banks.
“The solution found by many entrepreneurs is to ‘ask for money’ through these preferred shares and only remunerate shareholders if the company makes a profit. Therefore, preferred shares are considered a hybrid capitalization instrument, being partly shares and partly debt of the company,” says Palazzo.
According to him, companies are often in difficult situations, but the majority shareholders do not want to relinquish control of the company, creating “super-preferred” shares that guarantee these shareholders almost as many rights as ordinary shareholders, in addition to granting them high dividends.
How are stocks taxed?
Before investing in stocks, it’s important to know what types of taxes and fees are involved in the investment.
Brokerage fees
are the fees charged by brokerage firms on stock purchase and sale transactions. Although they are the norm, some brokerage firms do not charge brokerage fees.
Fees and settlement charges
are levied by B3 on the value of each transaction.
Income Tax:
There is a difference between regular transactions, which are taxed at 15% on profits, and day trading transactions, which are taxed at 20% on profits.
However, if the investor’s monthly sales are below R$ 20,000, they are exempt from paying any income tax on the profit earned. It’s important to remember that this rule does not apply to day trading, a type of trading that is not exempt.
Deciphering stock acronyms and codes
It is common to use certain standardized terms and codes in the financial market as part of a set of rules that standardize the procedure.
Common shares , for example, are usually indicated by the abbreviation “ON” , while preferred shares may be indicated by the abbreviation “PN” .
As for how stocks receive their unique codes, they vary depending on the company names and the types of stocks being traded.
Lyrics
In the case of the first letters (usually 4) that make up the code representing the stock, it is an abbreviation of the company name, as in the case of “PETR3”, which represents a stock traded by the state-owned company Petrobras.
Numbers
In the case of numbers, they indicate the type of company stock that the code represents, ranging from 1 to 11.
1 – The number 1 represents the right to subscribe to a common share, meaning that by purchasing this asset, the investor acquires the right to buy a specific common share at a specific price, within a defined timeframe. An important aspect is that the investor can choose not to exercise the right to purchase and instead sell it to third parties.
2 – Number 2 represents the same right as number 1, but regarding preferred shares, not common shares.
3 – Number 3 refers to the most common value, relating to common shares, those with voting rights and no preference in receiving dividends.
4 – Logically, the value 4 represents a preferred share, which does not give the holder the right to vote at shareholder meetings but guarantees priority in receiving dividends.
5, 6, 7 and 8 – Shares numbered 5 through 8 in their codes are, like share number 4, preferred shares; the difference is that they belong to different classes.
9 – The number 9 derives from the number 1, which is the subscription right for ordinary shares. By assuming the number 9, and before receiving the number 3 upon being actually purchased, the code comes to represent a subscription receipt, indicating that the security can now be traded at the price that had been determined.
10 – This is the same case as number 9, but for preferred shares.
11 – The number 11 represents so-called Depositary Receipts (DRs) or Units, which represent both common and preferred shares that are traded together.