Guide to choosing between common and preferred stocks based on your investor profile

When common and preferred shareholders make investment decisions, they often face a fundamental question: what type of stock best suits their financial goals? To answer this, it is necessary to understand that public companies issue various equity structures, each with different rights and benefits.

The Investor’s Dilemma: Profitability vs. Stability

Let’s imagine two completely opposite investors. One seeks aggressive growth of their capital and is willing to take significant risks. The other prefers predictable income streams and security. This fundamental contrast explains why there are two main categories of stocks in the market.

Common shareholders primarily pursue long-term capital appreciation. These investors accept market volatility in exchange for higher potential returns. In contrast, those seeking regular income and lower risks find preferred stocks a more conservative alternative.

Fundamental Characteristics of Each Type

Common Stocks: The Path to Growth

Common stocks represent the most basic ownership stake in a company. Their main features include:

• Voting rights at shareholder meetings, allowing investors to influence critical corporate decisions
• Variable dividends depending on the company’s financial performance
• Greater potential for capital growth, directly linked to business success
• In case of bankruptcy, receiving compensation only after debts and preferred shares are paid
• High liquidity in major markets, facilitating quick transactions

Preferred Stocks: The Safe Income Option

Preferred stocks occupy an intermediate position between debt and equity. Their distinctive features are:

• No voting rights, reducing influence over corporate decisions
• Fixed or pre-established rate dividends, often cumulative
• Priority over common shares in dividend payments and liquidation
• Lower growth potential, though with more predictable returns
• Generally limited liquidity compared to common stocks

Special Classifications Within Each Category

Companies offer variants tailored to different strategies. Among preferred stocks, we find cumulative (where unpaid dividends are transferred to future periods), convertible (convertible into common shares under certain conditions), redeemable (buyback by the company), and participating (linked to specific financial results).

In the case of common stocks, there are non-voting shares and multi-class structures that allow certain groups to maintain corporate control without holding the majority of shares.

Priority Rights in Critical Moments

During company liquidation, the hierarchy is clear: creditors are paid first, then bondholders, followed by preferred shareholders, and finally common shareholders. This structure explains why preferred stocks are considered less risky.

Regarding dividends, preferred shareholders have absolute priority. If a company faces financial constraints, preferred stockholders receive payments before common shareholders.

Comparative Analysis of Historical Performance

The S&P U.S. Preferred Stock Index, which accounts for approximately 71% of the preferred stock market traded in the U.S., provides valuable insight. Over a five-year period, this index fell by 18.05%, while the S&P 500 increased by 57.60%. This divergence reflects how these two types of investments respond differently to changes in monetary policy.

When interest rates rise, preferred stocks tend to decline in value, behaving similarly to bonds. This phenomenon mainly affects investors seeking short-term returns.

Strategies According to Investor Profile

For High-Risk Investors

Common shareholders pursuing aggressive growth are often in early or mid stages of their financial lives. They have broad time horizons to recover from market fluctuations. These investors prioritize capital appreciation over immediate income.

For Conservative Investors

Shareholders valuing stability, often in capital preservation phases or nearing retirement, find preferred stocks an ideal solution. They prioritize regular, predictable income streams, accepting lower growth opportunities in exchange for protection.

How to Start Investing in Both Types

The acquisition process follows similar steps for both categories:

Step 1: Choose a Reliable Broker

Select a regulated platform that offers access to both types of stocks and provides suitable analysis tools.

Step 2: Create and Fund Your Account

Complete registration with your personal and financial details, making an initial deposit according to your capacity.

Step 3: Define Your Investment Strategy

Analyze companies of interest in detail: their financial results, sector position, growth prospects, and dividend policies.

Step 4: Execute Your Orders

From your platform, choose between market orders (current price) or limit orders (specific price you set). Some platforms also offer CFDs on these stocks, allowing you to trade without directly owning them in your portfolio.

The Importance of Diversification

A recommended strategy is to combine both types of stocks in your portfolio. Mixing common and preferred stocks helps balance risk and return, allowing you to benefit from the volatility of the former without being fully exposed to it. This approach reduces the likelihood of significant losses while maintaining growth opportunities.

Regularly review your investment and adjust your strategy according to changes in market conditions and your personal financial situation.

Conclusion: Choosing What Works for You

The distinction between common and preferred stocks is not academic; it has real implications for your returns. Common and preferred shareholders respond to different motivations: some seek growth, others security. The key is aligning your stock selection with your financial objectives, time horizon, and risk tolerance. There is no universally superior option; only the right choice for each investor at each stage of their financial life.