Choose your Action: Common or Preferred according to your Investor Profile

When you decide to invest in stocks, you face a fundamental choice: common stocks or preferred stocks? It’s not just an academic distinction; each option responds to completely different objectives and risk tolerances. Understanding these differences between common and preferred shares is crucial before committing your capital.

The Investor’s Choice: Stability or Growth?

Your decision between preferred and common stocks depends on where you are in your financial journey.

If you seek predictable income, preferred stocks fit perfectly. These generate dividends with fixed or pre-established rates, often cumulative. This is the opposite of common stocks, whose dividends fluctuate based on company performance—they can be generous in boom years or nonexistent during crises.

If you aim for capital growth, common stocks offer greater potential. Your return depends both on dividends and on the appreciation of the stock price, directly linked to corporate success.

Rights Structure: Voting vs. Priority

The differences between common and preferred stocks go beyond dividends. The rights structure defines who has influence and who has protection.

Common stocks: decision-making power

• Grant voting rights at shareholder meetings
• Allow influence over the election of directors and strategic decisions
• In case of bankruptcy, you are last in line to receive compensation (only after creditors and preferred shareholders)
• Your corporate power is direct but your position in liquidation is vulnerable

Preferred stocks: financial protection

• Usually do not include voting rights, so you lose corporate influence
• But gain priority in dividend distribution
• In liquidation, you are ahead of common shareholders (though behind bondholders)
• It’s a trade-off: less voice, more security

Variants That Expand Your Options

Preferred stocks are not a monolithic product. There are multiple variants designed for different needs:

Cumulative: if the company does not pay dividends in a period, they accumulate and are paid later. Ideal if you fear suspension of payments.

Non-cumulative: missed dividends simply disappear. Less protection, but typically with higher initial rates.

Convertible: can be transformed into common shares under certain conditions. Allows you to change strategy as the company evolves.

Redeemable: the company can buy back the stock at a predetermined price. Limits your profit potential.

Participating: link your dividends to the company’s financial performance, combining elements of both classes.

Common stocks also have variants—some without voting rights or multi-class structures—but most retail investors access the standard version with full rights.

Practical Comparison: How They Perform in Different Scenarios

Sensitivity to interest rate changes deeply differentiates both options. Preferred stocks, with their fixed dividends, behave like bonds: when rates rise, their value falls (their yield becomes less attractive relatively). Common stocks do not have this structural sensitivity.

In terms of liquidity, large-company common stocks are highly liquid—you can quickly buy and sell on major markets. Preferred stocks typically have limited liquidity, with market restrictions and clauses complicating sales.

In price volatility: common stocks fluctuate widely based on market conditions and corporate performance. Preferred stocks are more stable, but that stability comes with a cap on gains.

What the Real Market Shows

The S&P U.S. Preferred Stock Index, representing about 71% of the preferred stock market traded in the United States, offers perspective on how these investments behave. Over a five-year period with changing monetary policy, this index fell 18.05%, while the S&P 500 (mainly) rose 57.60%. This gap illustrates how in rising rate environments, preferred stocks suffer more, but also reveals that in bear markets, their decline is smaller.

Investment Strategy: From the Start

Step 1: Choose your broker Look for a regulated platform. Not all offer preferred stocks with the same availability. Some also offer CFDs on these stocks, allowing exposure without direct ownership.

Step 2: Open your account and deposit Provide personal and financial documentation. Make your initial deposit.

Step 3: Define your specific strategy Analyze the company: financial figures, sector, stability, dividend history. For preferred stocks, verify if they are cumulative and the redemption conditions.

Step 4: Execute with smart orders Market orders (current price) or limit orders (your desired price). Both work; depends on your urgency.

The Balance That Reduces Risk

The most solid recommendation: diversify. Combine common stocks for growth and preferred stocks for stability. This mix adjusts your risk-return ratio according to your life stage.

Accumulation investors (under 40 years old, long-term horizon): 70-80% common stocks, 20-30% preferred stocks.

Preservation investors (approaching retirement): 40-50% common stocks, 50-60% preferred stocks.

Retirement investors: up to 70-80% preferred stocks if you need income flow, combined with solid company common stocks.

Preferred stocks appeal to those prioritizing regular income over exponential growth. Common stocks reward patience and tolerance for volatility with higher potential returns. There is no superior option; there is the right option for your specific situation. Periodically review your portfolio, adjust based on rate changes and conditions, and remember that education about the differences between common and preferred stocks is your best defense against impulsive decisions.