Preferred vs Common Shares: A Practical Guide to Choosing Your Investment

When you decide to invest in stocks, one of the first decisions is to determine which type of instrument suits your profile. Public companies offer two main categories: preferred shares and common shares. Although both represent ownership in the company, their characteristics, benefits, and risks are substantially different.

The Basic Structure: How Do Both Types Work?

Preferred shares occupy an intermediate position in the corporate capital structure, functioning as a hybrid between traditional debt instruments and equity capital. They are characterized by offering predetermined dividends, usually with fixed or pre-established rates. However, unlike bonds, they do not create a legal obligation to reimburse the invested capital.

Common shares, on the other hand, represent the most traditional form of equity participation. They grant their holders significant voting rights at corporate assemblies, allowing influence over strategic decisions such as the election of directors. Although dividends are possible, their amount depends entirely on the company’s financial performance.

Embedded Rights: The Key Difference

The most evident distinction between these investments lies in decision-making power. While holders of preferred shares lack voting rights in corporate matters, common shareholders actively participate in corporate governance. This absence of voting rights in preferred shares is compensated with stronger financial guarantees.

In the event that the company declares insolvency or liquidation, the payment hierarchy places preferred shareholders ahead of common shareholders, though always after creditors and bondholders. Common shareholders face a higher risk of losing their investment in these critical scenarios.

Regarding dividends, preferred shareholders have superior guarantees. Their payments are prioritized and, in many variants (particularly cumulative), unpaid dividends accumulate for future periods, ensuring eventual compensation.

Types Within Each Category

Preferred shares present multiple variants designed for specific strategies:

• Cumulative: Accumulate unpaid dividends for future payments
• Convertible: Can be transformed into common shares under agreed conditions
• Redeemable: The company can buy them back at a specified time
• Participating: Link dividends to the company’s financial performance

Common shares also have subcategories, such as those without voting rights (allowing participation in profits without decision-making influence) or multiple classes, where different categories have unequal voting rights and dividends.

Historical Performance: Evidence of Different Behavior

Market indices clearly demonstrate how these investments evolve under different economic conditions. During a five-year period marked by changes in monetary policy:

• The S&P U.S. Preferred Stock Index (which represents approximately 71% of the preferred stock market traded in the U.S.) experienced a decline of 18.05%
• The S&P 500, dominated by common stocks, recorded an increase of 57.60%

This divergence illustrates how preferred shares, sensitive to interest rate changes, behave similarly to bonds, while common stocks capture economic growth and corporate innovation potential.

Risks and Returns Analysis

Preferred shares:

• Low risk, with predictable returns
• Limited growth potential due to current interest rates
• Lower market liquidity, with sale restrictions
• Increased security in corporate crisis scenarios
• Dividends may be suspended during severe financial instability

Common shares:

• Significant risk, subject to market volatility
• Substantial appreciation potential linked to corporate success
• High liquidity, enabling quick transactions in main markets
• Direct exposure to economic cycles and business decisions
• Variable or nonexistent dividends during periods of poor performance

Investor Profiles: Choosing Your Instrument

For conservative investors: Preferred shares align with those prioritizing income stability. Typically, these are individuals nearing retirement, capital preservation, or those with risk aversion who value predictable cash flows.

For growth-oriented investors: Common shares attract those willing to accept volatility in exchange for significant profit potential. These investors have long-term horizons to overcome short-term fluctuations and seek to increase their portfolio value over time.

Diversification strategy: Combining both categories allows building balanced portfolios, mixing the benefits of fixed income (via preferred shares) with growth potential (via common shares), adjusting risk exposure according to your personal goals.

Essential Comparative Table

How to Start Your Investment

Step 1: Choose a regulated broker
Select a reliable and authorized platform that offers access to both types of instruments.

Step 2: Set up your account
Complete required personal and financial information, making the initial deposit.

Step 3: Develop a strategy
Deeply analyze the company: financial performance, sector position, growth prospects.

Step 4: Place orders
Use “market” orders (at current price) or “limit” orders (at set price). You may also consider CFDs on these stocks if your broker offers them.

Final Reflection

The choice between preferred shares and common shares is not about which is “better,” but which suits your financial situation, time horizon, and risk tolerance. Historical data from the S&P U.S. Preferred Stock Index versus the S&P 500 show that these investments respond to completely different dynamics, reflecting how macroeconomic changes impact each category differently. An informed strategy combines knowledge of both types with discipline in diversification and continuous monitoring of your investment.