What the distinction actually is
Ad group negatives apply to a single ad group. If you add "free" as a negative at the ad group level, only that ad group is protected. Every other ad group and campaign in your account can still serve ads on queries containing "free."
Negative keyword lists live in your Shared Library. You build a list once, then apply it to as many campaigns as you want. A change to the list — add a term, remove one — updates every campaign that uses it simultaneously.
That's the functional difference. The strategic difference is about scope.
When to use a negative keyword list
Use a shared list whenever the exclusion applies across multiple campaigns. The common cases:
Competitor exclusions. You're bidding on competitor names in one campaign and want to make sure those same competitor terms don't show up in your generic campaigns. One list, applied everywhere that needs it.
Irrelevant category terms. If your product is commercial software and you consistently get "free," "download," or "open source" traffic you don't want, build a list. The terms are irrelevant to your business, not just to one ad group.
Brand protection in non-brand campaigns. Add your own brand terms as negatives via a shared list to prevent cannibalization without maintaining the exclusion campaign by campaign.
A shared list also reduces maintenance overhead significantly. Account growth means more campaigns. If your negative keyword strategy is a collection of ad group-level exclusions, every new campaign starts without protection.
When to use ad group negatives
Ad group negatives make sense when an exclusion is specific to a single ad group's intent — not the whole campaign or account.
The clearest example: a campaign with both brand and generic ad groups. A query like "how to use [product]" might be fine for your informational ad group but wrong for your conversion-focused brand ad group. Adding it as a negative at the ad group level lets you block it precisely without over-excluding it everywhere.
Similarly, if you have ad groups organized by product category, a term that's irrelevant for one category might be exactly what another category is targeting. A campaign-level exclusion would block the wrong thing.