How to choose between common and preferred stocks: A guide for investors

In financial markets, there is a variety of investment instruments, but when we talk about stocks, we mainly encounter two fundamental categories. The choice between them directly depends on your investor profile and your financial goals. This article unpacks the key aspects that differentiate these two products and how to use them in your investment strategy.

Common Stocks: The Path to Growth

Common stocks represent the most widespread form in stock markets. By purchasing them, you become a partial owner of the company, with the right to participate in its corporate decisions through voting at shareholder meetings.

Main characteristics and rights

Holders of common stocks can elect board members and vote on strategic matters. Their compensation comes from two sources: dividends (when the company generates sufficient profits) and capital appreciation (when the stock price rises in the market).

However, in terms of payment hierarchy during bankruptcy, these shareholders occupy a higher-risk position. Only after all debts are covered and preferred stockholders are paid will they receive compensation for their investment.

Advantages and challenges

The main appeal lies in its potential for long-term profitability, especially in companies with a growth track record. Liquidity is also an advantage: they can be quickly sold in major markets without significant restrictions.

Nevertheless, they face considerable exposure to market volatility. Dividends fluctuate according to business performance and can even be completely eliminated during crises or periods of economic underperformance.

Preferred Stocks: Stability and Relative Security

Preferred stocks occupy an intermediate position within the corporate capital structure, combining features of both debt and equity. Their hybrid nature makes them attractive to a specific segment of investors.

Nature and modalities

This type of stock offers fixed dividends established in advance, usually at fixed or predetermined rates. There are several subcategories: cumulative (where unpaid dividends are carried over to future periods), convertible (which can be transformed into common stocks under specific circumstances), redeemable (which the company can buy back), and participative (whose dividends are linked to financial performance).

Rights and position in the hierarchy

Unlike common stocks, owners of preferred stocks typically do not have voting rights in corporate decisions. Their compensation comes solely from predictable dividends.

In liquidation scenarios, their position is more favorable than that of ordinary shareholders but still below creditors and bondholders. This advantage provides greater relative security in adverse situations.

Risk and return profile

Returns are more predictable thanks to fixed dividends, making them sensitive to changes in interest rates (similar to bonds). The potential for capital appreciation is significantly lower compared to common stocks, limiting gains in bullish markets.

Performance comparison in the real market

To illustrate practical differences, consider the behavior of relevant indices over the past five years. The S&P U.S. Preferred Stock Index, which accounts for approximately 71% of the preferred stock market traded in the United States, experienced an 18.05% decline. In the same period, the S&P 500 (mostly composed of common stocks) recorded a 57.60% increase.

This divergence reflects a fundamental aspect: when interest rate environments change, fixed-yield preferred stocks suffer valuation pressures, while common stocks can benefit from economic expansion and business growth.

Key differences table

How to invest in both modalities

To start investing in common or preferred stocks, follow these steps:

Step 1: Choose a reliable broker
Look for regulated platforms offering access to both classes of stocks. Check their reputation and fees.

Step 2: Open and fund your account
Complete registration by providing personal and financial data. Make your first deposit according to your investment capacity.

Step 3: Analyze and define your strategy
Study the company’s financial performance, sector, and outlook. Decide whether you seek growth, regular income, or diversification.

Step 4: Place your buy order
You can opt for “market” orders (at the current price) or “limit” orders (at the price you specify). Some brokers also allow trading via CFDs on these stocks.

Strategy based on your investor profile

For aggressive investors: Common stocks are the natural choice. If you have a long-term investment horizon (10+ years) and tolerate significant fluctuations, this instrument can generate higher returns. Ideal if you are in early capital accumulation phases.

For conservative investors: Preferred stocks better align with capital preservation and regular income goals. They are particularly attractive for retirees or those requiring predictable cash flows.

For moderate investors: Diversification is key. Combine both classes of stocks to balance risk and return. This strategy reduces portfolio volatility while maintaining growth potential.

Conclusion: Make an informed decision

The choice between common and preferred stocks is not a one-size-fits-all decision. It depends on your financial situation, risk tolerance, time horizon, and specific objectives.

Market data show that both play important roles in a well-constructed portfolio. While common stocks offer growth potential at the cost of volatility, preferred stocks provide stability and predictable cash flows. Educating yourself about these differences positions you to make smarter, more aligned financial decisions.