How to choose between common and preferred shares based on your investor profile

When you decide to enter the stock market, one of the most important decisions is understanding what type of preferred and common shareholders you can become. Not all stocks perform the same, and choosing the right one depends directly on your time horizon and risk tolerance.

The Two Sides of Equity Investment

Every publicly traded company issues mainly two categories of shares: common and preferred. Although both represent ownership in the company, their characteristics are almost opposite. Understanding these differences is not an academic luxury but a practical necessity for anyone looking to invest intelligently.

Market reality shows that common shareholders and preferred shareholders have completely different interests and rights. While some seek influence over corporate decisions, others simply want stable income without involvement in management.

Common Shares: Growth Potential with Volatility

Common shares are the most popular and accessible type. They represent true ownership in the company, and their holders enjoy voting rights at shareholder meetings. This means you can influence crucial decisions like electing directors.

The attractive side is the potential for capital appreciation. When the company prospers, the value of your shares can grow significantly. Dividends can also be substantial during high-profit periods. However, here’s the breaking point: these dividends are variable and not guaranteed. During crises, they could disappear entirely.

In the event of corporate bankruptcy, common shareholders are at the end of the payout line, after creditors, bondholders, and preferred shareholders. This is the risk you accept in exchange for the potential of higher gains. Additionally, these shares are highly liquid in major markets, meaning you can sell them quickly when needed.

Preferred Shares: Security in Exchange for Control

Preferred shares occupy a fascinating intermediate territory: between debt and equity. Their hybrid characteristics make them unique.

First, preferred shareholders generally do not have voting rights in corporate decisions. This is the main trade-off: renouncing influence for stability. Dividends here are fixed or pre-established, often cumulative, meaning if a company cannot pay them in a period, they accumulate to be paid later.

In liquidation, you have priority over common shareholders, though below creditors and bondholders. This privileged position in the payment hierarchy makes them attractive to conservative investors.

There are special variants: convertible shares that can be transformed into common shares under certain conditions, redeemable shares that the company can buy back, and participating shares whose dividends are linked to financial results. Each adapts the instrument to different investment strategies.

Comparative Table: What to Expect with Each Type

Practical Steps to Get Started

If you’re committed to investing in both categories, the path is straightforward:

Choose a regulated platform. Broker security and regulation are not optional. Look for operators with valid licenses.

Open your account by completing personal and financial data. Many platforms allow starting with small deposits.

Conduct thorough analysis of the companies you’re interested in. Review their financial statements, industry sector, competitive position, and growth prospects.

Execute your orders choosing between market purchase (current price) or limit orders (specific price you set). Some brokers also offer CFDs on these stocks, allowing you to trade without owning them directly.

What Investor Profile Are You?

Common shareholders are usually individuals in early or mid-stages of their financial life, willing to accept temporary volatility in exchange for long-term growth. They are portfolio entrepreneurs, seeking capital appreciation, with a time horizon of 10 years or more.

Preferred shareholders, on the other hand, tend to be near retirement or in capital preservation phases. They prioritize predictable income, seek to reduce risk exposure, and value security over spectacular opportunities. Some also use them as diversification vehicles, combining benefits of fixed and variable income.

The optimal strategy for many is a mix: common shares for future growth, preferred shares for current cash flow. This balances the portfolio between risk and return.

The Market Speaks: Historical Performance Data

A revealing analysis compares the S&P U.S. Preferred Stock Index against the S&P 500 over a five-year period. The preferred stock index, representing approximately 71% of the preferred market traded in the U.S., fell 18.05%. In contrast, the S&P 500 rose 57.60%.

This dramatic divergence reflects how they respond differently to changes in monetary policy. When interest rates rise, fixed dividends of preferred stocks become less attractive, pushing their prices down. Common stocks, linked to economic growth, benefit from other market factors.

Conclusion: Your Decision, Your Risk

Choosing between being a preferred or common shareholder is not a one-time decision but a recurring construction with each investment. A balanced portfolio could include both categories, adjusted to your age, goals, and risk tolerance.

Diversify, monitor your positions regularly, and adjust when conditions change. The market rewards those who understand the rules of the game.