How to choose between preferred and common stocks based on your investor profile

When entering the stock market world, one of the first decisions you face is choosing between preferred and common shares. It’s not a trivial choice because each type of share offers a different path toward your financial goals.

The Two Sides of Investing in Shares

Public companies do not issue all their shares in the same way. There are mainly two categories that function almost like different financial products, even though both represent ownership in the company.

Common shares are the classic investment vehicle. They allow you to own a part of the company and give you voting rights on key decisions. In exchange, you assume all the market volatility. Your dividends depend directly on the company’s financial performance: in good years, you may receive substantial payments; in difficult years, they could be minimal or nonexistent.

Preferred shares, on the other hand, operate in a hybrid territory between debt and equity. You give up the ability to influence corporate decisions but gain compensation: predetermined dividends paid before common shares. It’s an exchange: less power, more predictability.

Rights That Radically Differentiate Them

The gap between these two instruments is clearly reflected in their fundamental characteristics:

Common shares offer:

• Voting rights at shareholder meetings
• Variable dividends depending on profitability
• High potential for capital growth
• Greater liquidity in main markets
• In liquidation: access to assets only after creditors, bondholders, and preferred shareholders

Preferred shares guarantee:

• No corporate voting rights
• Fixed or pre-established rate dividends
• Limited growth potential
• Generally more restricted liquidity
• In liquidation: priority over common shareholders (although lower than debts)

There are sophisticated variants: cumulative preferred shares that reserve unpaid dividends for future periods, convertible ones that can be transformed into common shares under certain conditions, and redeemable ones that the company can buy back as needed.

The Comparison Every Investor Must Know

Who Is Each For?

Common shares appeal to risk-capable investors. They are the choice for those seeking to build wealth long-term, who can tolerate temporary price drops, and want to influence corporate decisions. Typically preferred by investors in early or mid phases of their financial life, where the time horizon is extensive and the goal is to maximize capital growth.

Preferred shares attract those prioritizing income stability. They are especially popular among retirees, conservative investors, and those approaching capital preservation phases. They also serve as a diversification tool in balanced portfolios, combining features of fixed income and equities to optimize risk-return ratio.

What the Numbers Reveal

Observing key indicators like the S&P 500 versus the S&P U.S. Preferred Stock Index (which accounts for approximately 71% of the preferred stock market in the U.S.) illustrates different dynamics. Over the past five years, the S&P 500 rose 57.60%, while the preferred index fell 18.05%. This divergence reflects how changes in monetary policies impact these instruments differently: when interest rates rise, preferred shares (with fixed dividends) lose attractiveness compared to alternative investments, while common shares depend more on business growth.

How to Start: From Theory to Action

Step 1: Choose your broker
Find a regulated platform with a good reputation that offers both preferred and common shares. Verify it has analysis tools and limit orders.

Step 2: Open your account and deposit funds
Complete KYC procedures (identity verification), provide your financial data, and make your first deposit.

Step 3: Research before investing
Analyze the company: profit margins, sector trends, dividend history, financial stability. Understand which type of share best fits your strategy.

Step 4: Place your order
You can use “market” orders (current price) or “limit” orders (set the maximum price you pay). Some brokers also allow trading CFDs on these shares, without owning them in your portfolio.

Smart Strategy: Diversification as a Shield

True mastery lies in not choosing one over the other but in balancing them. A well-structured portfolio mixes common shares for growth and preferred shares for stability. Thus:

• Reduces overall portfolio volatility
• Ensures more predictable income streams
• Maintains exposure to appreciation potential
• Protects against abrupt interest rate changes

Review your investment periodically. The market changes, so do your circumstances. Adjust your mix of preferred and common shares as your time horizon and financial goals evolve.

Conclusion

The choice between preferred and common shares is not binary. It’s a decision that reflects your risk tolerance, return objectives, and life stage. Market data shows that both have their place: while the S&P 500 has captured spectacular gains in growth environments, preferred shares have provided stability during turbulence. The key is understanding what you seek and acting accordingly.