The Investor's Compass: Common Stocks vs Preferred Stocks

When an investor decides to venture into the stock market, one of the first critical decisions is choosing between common and preferred shares. It’s not a trivial decision: each type responds to different financial needs and radically different market behaviors.

Why aren’t all shares the same?

Public companies issue multiple categories of shares precisely because investors have diverse profiles and objectives. A company needs capital but also wants to retain control; thus, it designs instruments that attract everything from speculators to retirees seeking stable income. Common and preferred shares are the clearest expression of this reality.

Common Shares: For those seeking growth

Ordinary shares are the most accessible and dynamic investment instrument. They represent actual ownership in the company and offer two channels of profit: capital appreciation (when the price rises) and variable dividends depending on profitability.

Their key features:

• Voting rights at corporate assemblies
• Dividends linked to financial performance (can be high or nonexistent)
• High liquidity in main markets
• Greater potential for long-term growth
• In bankruptcy: last priority in recovery

Ideal profile: Investors with a long-term horizon, risk tolerance, and seeking exponential growth. Typically, people in intermediate stages of their financial careers.

Preferred Shares: For those seeking stability

Preferred shares occupy a hybrid space: they are not debt, but not pure equity either. They combine elements of both worlds to attract conservative investors.

Their distinctive attributes:

• No voting rights
• Fixed or pre-established rate dividends (often cumulative)
• Greater security in case of liquidation (better position than common, but inferior to creditors)
• Sensitive to interest rate changes
• Limited capital appreciation

Special variants: There are convertible preferred shares (convertible into common), redeemable (buyback by the company), and participative (dividends linked to results).

Ideal profile: Investors close to retirement, prioritizing predictable income flows. People in capital preservation mode who need to reduce volatility.

Direct Comparison: What you need to know

The Real Impact on Portfolios: Market Evidence

The contrast between these two worlds is clearly reflected in benchmark indices. Over the past five years, the S&P 500 (dominated by common shares) captured a 57.60% increase, while the S&P U.S. Preferred Stock Index (representing approximately 71% of the US preferred market) recorded a decline of 18.05%.

This divergence is no coincidence: it reflects how rising interest rate environments penalize preferred shares (because their fixed dividends become less attractive compared to bonds), while benefiting the growth of dynamic companies.

Strategy: Choose According to Your Profile

Aggressive Investor: Accumulates common shares in growth companies. Tolerates volatility and seeks appreciation over 10+ years. May ignore dividends.

Moderate Investor: Mixes both categories. Uses preferred shares as a volatility buffer (typically 30-40% of portfolio) and common shares as a growth engine (60-70%).

Conservative Investor: Dominates with preferred shares, especially cumulative ones. Complements with common shares of “blue chip” (sound, with consistent historical dividends).

How to Start: Step by Step

1. Choose a regulated broker: Verify licenses and reputation
2. Open your account: Complete identity and financial data verification
3. Make your first deposit: Amount according to your capacity
4. Analyze companies: Review financial statements, sector, competition
5. Place your order: Choose between “market order” (current price) or “limit order” (your price)
6. Consider CFDs: If your broker offers them, you can speculate without physically owning the shares

Final Recommendation for Diversification

True strength doesn’t lie in choosing one or the other but in strategically combining them. A balanced portfolio mixes common and preferred shares adjusting the proportion based on your age, risk tolerance, and current income needs. Periodically review your allocation and adjust as market conditions change.

The question isn’t “which is better?” but “which fits where I am now and where I want to be?”