Exploring the Three Main Classes of Shares: Common, Preferred, and Unit

If you are thinking about starting to invest in stocks, you have probably come across abbreviations like ON, PN, and UNIT. But what truly differentiates these securities? And which one best suits your investor style? This straightforward guide will answer these questions and help you navigate the Brazilian stock market with more confidence.

Fundamentals: What are stocks and why invest?

When you buy a stock, you are not simply acquiring a digital paper. You are becoming the owner of a real fraction of a company. Imagine dividing a pizza into a thousand slices – each stock represents one of these slices, and you gain rights and responsibilities proportional to what you own.

Companies offer stocks to the public for a practical reason: they need money. Whether to expand factories, finance research, or simply cover operational costs, stocks are a powerful instrument to raise capital. For you, the investor, stocks represent the opportunity to participate in the profits generated by these operations.

The rights you gain as a shareholder:

Unlike someone who lends money to a company (such as in fixed income securities), the shareholder has special rights. The most important is the voting right in strategic decisions. Additionally, you are entitled to dividends – basically, a portion of the profits the company distributes to its owners. There is also the possibility of subscription of new shares and bonuses, mechanisms that allow increasing your stake without additional investment.

The risk side:

Here’s the critical point: stocks are variable income investments. Your returns are not guaranteed. A company can prosper and its stocks soar in value, or it can face difficulties and you may lose part of your investment. That’s exactly why diversification is essential and understanding the types of available stocks matters so much.

The Investor’s Choice: Start with Common or Preferred Shares?

This is the question every beginner asks. The answer depends on your profile and objectives.

Common Shares: For Those Who Want a Voice

Common shares (ON) are identified in trading codes by the number “3” at the end of the ticker. PETR3 (Petrobras), VALE3 (Vale), and ITUB3 (Itaú Unibanco) are classic examples.

The main difference of common shares is the power of decision. Owning common shares means you can vote at the company’s general meetings. The more shares you hold, the greater your influence. This is crucial when important decisions are made – changes in management, approval of larger investments, statutory amendments.

Furthermore, like any shareholder, you are entitled to dividends, subscription in new issues, and can receive bonuses when the company decides to distribute additional shares.

The trade-off of common shares:

Not everything is advantages. Common shares generally have less liquidity than their preferred counterparts. This means it might be harder to sell your shares quickly if you need cash fast. Also, in case of bankruptcy, common shareholders have lower priority in receiving the remaining assets.

Preferred Shares: For Those Who Prefer Dividends

Identified by the number “4” or “5” at the end of the ticker (PETR4 for Petrobras, SANB4 for Santander, GGBR4 for Gerdau), preferred shares (PN) were created with investors who seek more predictable returns.

The name “preferred” reveals the secret: you have priority in receiving dividends. In many cases, the company’s bylaws set a minimum percentage or even a predetermined amount to be distributed to PN holders. Banco Santander Brasil, for example, historically distributes 10% more dividends to its PN compared to its ON.

You also have preference in case of liquidation – if the company goes bankrupt, your money is returned first.

The caveat: less decision power

The price of this security is the lack of voting rights. As a holder of preferred shares, you do not participate in meetings nor influence strategic decisions. For most small investors, this is irrelevant. But if you want to have some voice in the company’s management, PN might seem limited.

Higher liquidity:

A practical advantage: preferred shares tend to be more traded, making it easier to buy or sell quickly. Companies like Bradesco (BBDC4) and Klabin (KLBN4) have highly liquid PN.

Units: The Solution for Those Who Want the Best of Both Worlds

Imagine having in a single operation the voting rights of a common share and the dividend preference of a preferred share. That is essentially what a Unit offers.

Units are structured packages that combine different classes of shares issued by the same company. A typical Unit may consist of 1 common share + 4 preferred shares, bundled as a single tradable asset. Practical examples include Santander (SANB11), Klabin (KLBN11), and Sanepar (SAPR11).

Practical advantages:

The first advantage is convenience. Instead of doing two separate transactions (buying an ON and then a PN), you do one and acquire both. For investors seeking diversification, this saves time and sometimes reduces costs.

Liquidity is generally higher, especially in companies where individual shares are not heavily traded. And you get balanced exposure: participate in voting but also have protection in receiving dividends.

Disadvantages and limitations:

The main limitation is inflexibility. The company decides the ratio of ON and PN within the Unit. You cannot say “I want 2 ON and 2 PN” – you accept the package as structured. Also, if at some point you want to dismantle the Unit into its individual components (conversion), there may be costs involved.

Tag Along: The Mechanism That Protects Your Investments

Here’s something many beginner investors don’t know but should be aware of: Tag Along.

Imagine this scenario: you are a minority shareholder of a company. Suddenly, a large investment fund approaches the controlling shareholders (those who hold the majority) offering a price to buy out their entire stake. The question is: do you want to stay tied to the company under new management, or do you want to exit too?

Tag Along is your shield. It guarantees that if there is a control sale, you have the right to “follow” the transaction under the same terms – that is, at the same price offered to the controllers.

Not all stocks offer Tag Along with the same protection. For example, Companhia de Transmissão de Energia Elétrica Paulista (TRPL3) provides only 80% Tag Along for ON shares and 0% for PN. This means PN holders have no protection in case of a control sale – a significant disadvantage.

Always check Tag Along clauses before investing significant sums.

Practical Comparison: Which to Choose According to Your Profile?

Do you want influence in the company? Choose Common Shares (ON). Ideal for investors seeking decision-making power and a long-term horizon.

Prioritize periodic income and security? Go with Preferred Shares (PN). Perfect for those who want more predictable dividends and higher liquidity to exit quickly if needed.

Want simplicity with diversification? Units are your answer. Combine them with a well-thought-out strategy and you have diversified exposure in a single transaction.

Final Reflection: Education is Your Best Investment

Stocks, in their different forms, represent one of the most powerful tools for wealth building. But this power comes with responsibility. Before investing money in any asset, research the company, understand its fundamentals, review terms (like Tag Along), and assess whether that type of stock aligns with your goal and risk tolerance.

The Brazilian stock market offers genuine opportunities. It’s not just numbers on a screen – you are truly acquiring a stake in real companies that generate value. Respect this power, keep learning, and invest with conviction.