Back in the day, arcade and console hardware ran at weird native resolutions like 384×224. When they were hooked up to a standard arcade monitor, the picture was automatically resized to standard 4:3 resolution.
We assume that the game designers intended their sprites to be viewed at 4:3 resolution. There’s no real debate here because Capcom and other companies used to manufacture complete arcade cabinets, so they knew the end result would be displayed at 4:3.
As a result, when you go from standard resolution to native resolution on an emulator, all the characters look short and wide. The whole screen looks stretched because 384×224 is actually 12:7 resolution. That’s a messed up ratio that doesn’t make sense at all.
However, the main advantage to native resolution is that it represents every pixel. So for archival purposes, sometimes it’s better to store screenshots at native resolution because it’s easy to stretch that image to 4:3 later. On the other hand, there’s no way to go back from 4:3 to native resolution because you can’t tell what the original pixels were when you look at a resampled 4:3 image. Resizing aspect ratios is inherely lossy.
But then again, compressed video is lossy too. If you’re going to show a video to a general audience, it’s usually better to go with the intended 4:3 ratio. That’s how everyone played it so that’s what looks natural and familiar to everyone.