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

When it comes to investing in the stock market, choosing the right type of stock is fundamental. Not all stocks perform the same, and understanding their particularities can make the difference between a successful investment and a mediocre one. Companies mainly offer two categories: common stocks and preferred stocks, each designed for different investor profiles.

The investor’s dilemma: return or security?

The decision between a common stock and a preferred stock is not trivial. While the former promises higher growth potential, the latter offers income stability. This divergence reflects completely opposite investment strategies.

Common stocks: volatility with opportunity

Common stock represents the most traditional form of equity participation. By investing in this type of stock, you get:

• Voting power: Right to vote at shareholder meetings, allowing you to influence corporate direction
• Unlimited potential: The value can grow significantly with business success
• Superior liquidity: Fast and efficient transactions in major markets
• Variable dividends: Fluctuate according to profitability, which can mean large payments or none at all

However, this flexibility comes at a price. In case of bankruptcy, you recover your investment only after creditors and preferred shareholders.

Preferred stocks: predictable income

For their part, preferred stocks function as a hybrid between bonds and equity:

• Fixed and priority dividends: Guarantee regular income before common shareholders
• Greater protection in liquidation: Priority over ordinary shareholders (although they cede to debts)
• No voting rights: Sacrifice corporate influence for stability
• Interest rate sensitivity: Their yields behave similarly to fixed-income instruments

Preferred stocks attract retirees and conservative investors; common stocks attract entrepreneurs and speculators.

Variants within each category

Both common and preferred stocks have subtypes. In the case of common stocks, some lack voting rights, while others belong to “multiple classes” with differentiated rights. Preferred stocks can be cumulative (carry unpaid dividends), convertible (transform into common stocks under certain conditions), or redeemable (the company repurchases them).

Real performance comparison

Market data speaks clearly. Over the past five years:

• S&P 500 (mostly common stocks): +57.60%
• S&P U.S. Preferred Stock Index (preferred stocks): -18.05%

This divergence underscores how restrictive monetary policy hits preferred stocks especially (sensitive to interest rates), while common stocks recover with expanding economic cycles.

Step-by-step: how to invest

1. Choose a regulated platform: Security is a priority. Look for authorized brokers with good reputation.

2. Open your account: Provide personal and financial data; often requires an initial deposit.

3. Analyze before buying: Study company numbers, sector, market trends.

4. Execute your order: Use “market” orders (current price) or “limit” orders (specific price). You can also trade via CFDs if your broker allows.

Strategy according to your profile

For aggressive investors: Common stocks are your allies. They tolerate volatility, seek accelerated growth, and have a long-term horizon (10+ years). Ideal in early or mid stages of financial life.

For conservative investors: Preferred stocks fit better. They prioritize regular cash flows, are close to retirement, value capital preservation, and accept moderate returns in exchange for predictability.

Mixed strategy: Many sophisticated investors combine both. Common stocks provide upside; preferred stocks, a floor of profitability. This diversification adjusts risk-return according to need.

Conclusion: context matters

There is no “best” type of stock in absolute terms. Common stock shines in environments of economic growth and low interest rates; preferred stocks resurface when uncertainty hits and fixed income yields become attractive.

The S&P U.S. Preferred Stock Index, representing approximately 71% of the US preferred market, highlights the institutional importance of this segment. Its divergent behavior relative to the S&P 500 reflects that these instruments respond to different logics.

Your choice should align with three factors: risk tolerance, time horizon, and income needs. Regularly monitor your portfolio and adjust according to market changes. Smart investing is not about pointing, but about pointing with knowledge.