How to choose between preferred and common stocks: a guide for investing wisely

If you’re new to the world of investments, you’ve probably heard about stocks, but not all are the same. Companies can issue different types, each with very distinct characteristics. The key to investing wisely is understanding what each option offers and which one best suits your profile.

The two pillars of the stock market: what is the real difference?

When a company decides to raise money by issuing stocks, it generally offers two main models: common stocks and preferred stocks. Although both represent an investment in the company, they operate in radically different ways.

Common stocks are the most traditional type. They grant you voting power on key company decisions, such as electing the board of directors. You also receive dividends, but these fluctuate depending on how well the company performs. If all goes well, you earn a lot; if there are problems, you might receive little or nothing.

Preferred stocks, on the other hand, operate under a different model. They do not allow voting, but in exchange, you receive more stable and predictable dividends. It’s like having a debt with capital advantages: the company pays you a fixed or pre-established percentage, and in case the company goes bankrupt, you have priority to recover your investment (although after creditors).

Breaking down the key features

Dividends: stability versus potential

With common stocks, dividends are variable. They depend entirely on the company’s financial performance. In good years, you might receive generous payments; in tough years, perhaps none.

Preferred stocks offer the opposite: fixed dividends or with a pre-set rate. Some types even accumulate unpaid dividends, ensuring you receive them in the future.

Decision-making power

Common shareholders can vote at meetings and influence the company’s direction. Preferred stockholders do not have this right, which limits their corporate influence.

Priority in case of problems

If the company goes bankrupt, the order of compensation is clear: first creditors, then bondholders, then preferred shareholders, and finally common shareholders. This means that if you own preferred stocks, you are in a better position than ordinary shareholders.

Varieties of preferred stocks you should know

There is no single model of preferred stocks. Several modalities are designed for different needs:

• Cumulative: Omitted dividends accumulate and must be paid afterward
• Convertible: Can be transformed into common stocks under certain conditions
• Redeemable: The company can buy them back at certain times
• Participating: Dividends are linked to the company’s financial results
• With protective clauses: Include safeguards against specific events

The investor profile: who chooses each type?

Young investors or those seeking growth usually prefer common stocks. They have a long-term horizon, can tolerate volatility, and aim to multiply their capital. Risk is part of their strategy.

Conservative investors, nearing retirement or focused on capital preservation find preferred stocks their best ally. They value a regular income stream over large capital gains and need to reduce their exposure to risk.

That said, many sophisticated investors combine both in their portfolio: using preferred stocks as stabilizers and common stocks for growth.

What the real market shows: performance comparison

The gap between these two types of investment is evident in market indices. The S&P U.S. Preferred Stock Index, which represents approximately 71% of the preferred stock market traded in the United States, experienced an 18.05% decline over a five-year period. In the same span, the S&P 500 (which includes common stocks of the 500 largest companies) grew by 57.60%.

This difference highlights how preferred stocks are more sensitive to interest rate changes, behaving more like bonds than traditional stocks.

Advantages and disadvantages of each option

Common stocks

Advantages:

• Significant growth potential
• High liquidity for buying and selling
• Influence on corporate decisions
• Possibility of substantial gains

Disadvantages:

• Considerable price volatility
• Unpredictable or nonexistent dividends in bad times
• Higher risk of capital loss

Preferred stocks

Advantages:

• Predictable income flow
• Greater security in liquidation
• Less sensitive to market changes
• Ideal for generating passive income

Disadvantages:

• Limited potential for capital appreciation
• No voting rights
• Lower liquidity, harder to sell
• Affected by interest rate changes

How to start investing: practical steps

If you decide to invest in either of these instruments, here is the process:

1. Choose your broker: Find a regulated, reliable platform that offers access to these securities
2. Open your account: Complete the required personal and financial information
3. Study the companies: Analyze their numbers, sector, prospects before deciding
4. Place your order: You can buy at the current market price or set a limit price
5. Consider CFDs: Some brokers offer Contracts for Difference on these stocks, allowing you to speculate without owning them

The smart strategy: mix both

Diversification is your best ally. Combining common stocks and preferred stocks in proportions that reflect your risk tolerance is wiser than betting everything on just one type.

For example, a retiree might hold 70% in preferred stocks and 30% in common stocks for some growth. A young investor might invert that proportion.

Conclusion: choose according to your financial reality

There is no universal answer about which is “better.” The choice depends on your age, goals, risk tolerance, and how much time you have ahead. Preferred stocks are for those who value certainty; common stocks for those who can wait and accept risks. The important thing is to understand what each offers before making decisions that will affect your wealth.