Which to choose? Preferred and common stocks according to your investment profile

When you decide to invest in stocks, the first question that arises is: what type of stock aligns with my objectives? The reality is that companies issue different categories of stocks, each designed to meet various investment needs. Understanding these differences is crucial before committing your money.

The two main worlds: common stocks versus preferred stocks

Common stocks represent direct ownership in a company. They are the most popular in stock markets because they offer what many investors seek: significant growth potential. Buyers of common stocks acquire voting rights at shareholder meetings, influencing important corporate decisions such as the election of directors. Dividends vary according to the company’s financial performance.

Preferred stocks, on the other hand, occupy a hybrid position between equity and debt. They do not grant voting rights but compensate with more stable and predictable dividends, usually fixed or with pre-established rates. In the event of corporate bankruptcy, preferred stockholders receive compensation before common shareholders, but after creditors.

Within each category: variants that matter

Common stocks can be divided into several classes. Some companies issue non-voting shares, allowing participation in profits without decision-making influence. Others use multiple class structures where each class offers different voting rights and dividends, maintaining certain groups with majority control even with smaller shareholdings.

In the case of preferred and common stocks within their subcategories, we find specialized modalities. Cumulative preferred stocks guarantee the payment of missed dividends in future periods. Convertible stocks allow transformation into common shares under specific conditions. Redeemable stocks can be repurchased by the company, while participating stocks link dividends directly to financial results.

Rights that set them apart: the investor’s compass

A common stock shareholder enjoys corporate influence through voting on business decisions. During liquidations, although behind creditors and bondholders, they precede preferred stockholders. Their dividends fluctuate with the company’s profitability.

A preferred stockholder waives voting rights but gains priority in dividend payments. They receive preferential compensation in liquidations. Although their dividends may be lower in potential, they offer predictability. Accounting-wise, they are classified as equity, although regulators may treat them as debt if they have bond-like features.

The game of advantages and risks

Common stocks: High liquidity, enabling quick transactions in major markets. Significant appreciation potential linked to corporate growth. Voting rights in corporate management. Conversely, they exhibit price volatility influenced by company performance and market conditions. Unpredictable dividends, possibly reduced or null during weak periods.

Preferred and common stocks: Comparatively, preferred stocks offer predictable dividends, generally higher than low-interest rates. Greater security in liquidations than common stocks, though less than bonds. Their weakness: limited growth potential compared to ordinary shares. Dividends may be suspended during financial crises. They lack voting power. Limited liquidity due to sale restrictions and redemption clauses.

Decision table: what to expect from each

The data that tells the full story

During the past five years, the S&P U.S. Preferred Stock Index fell 18.05%, while the S&P 500 grew 57.60%. This preferred stock index accounts for approximately 71% of the traded preferred stock market in the U.S., showing how these two segments respond differently to changes in monetary policy and economic conditions.

Strategy by profile: what suits each

For aggressive investors: Common stocks are the way. If you have a long-term horizon and tolerate volatility, growth potential compensates for risks. They are ideal in early to mid stages of financial life when maximizing your portfolio is a priority.

For conservative investors: Combining preferred and common stocks optimizes portfolios. If you prioritize steady income flow over explosive growth, and are in a capital preservation or retirement phase, preferred stocks offer stability. They reduce risk exposure and value dividend preference.

How to start: practical steps

Choose a regulated and trustworthy broker as your first step. Open an account by completing personal and financial information. Define your strategy by analyzing target companies: numbers, sector, prospects. Place market or limit orders as you prefer. Consider trading CFDs on these stocks if your broker offers them, without the need for physical ownership.

Final tip: Diversify by mixing common and preferred stocks according to your risk profile. Review your investment periodically and adjust your strategy if market conditions change. It’s not about preferred versus common stocks: it’s about preferred and common stocks together, balanced, according to your objectives.