Preferred vs Common Shares: A Guide to Choosing the Right Investment

If you’re new to the world of investing, you’ve probably heard about preferred and common stocks, but you’re not quite sure which to choose. The reality is that these two have radically different characteristics, and your choice will directly depend on your investor profile.

Why Are There Two Types of Stocks?

Companies do not issue a single type of stock for a simple reason: they need to attract investors with very different profiles. Some want controlling interest in the company; others are only seeking safe passive income. That’s why they created common and preferred stocks, each satisfying opposing needs.

Common Stocks: For Those Seeking Growth

Common stocks are the most well-known and the ones you see on any stock exchange. Their main feature? They give you voting power in company decisions.

Main Rights of Common Stocks

• Voting rights at shareholder meetings (you can influence corporate decisions)
• Variable dividends depending on the company’s financial results
• Higher liquidity: you can sell them quickly on major markets
• High growth potential if the company prospers
• Significant risk: prices can drop dramatically

In case of bankruptcy, your money is recovered only after debts, bonds, and preferred stocks are paid. So, you are last in line.

Who Should Buy Common Stocks?

Young investors or those with a long-term horizon. People willing to tolerate volatility now in exchange for higher gains later. If you’re 20 or 30 years old, these are ideal for your portfolio.

Preferred Stocks: The Conservative Option

Preferred stocks are somewhat like a middle ground between a bond and a common stock. They offer regular income without giving you decision-making power.

Key Features of Preferred Stocks

• No voting rights: you do not participate in corporate decisions
• Fixed or pre-established dividends: you know exactly how much you’ll receive
• Payment priority: if the company has profits, you get paid before common shareholders
• Lower volatility: prices fluctuate less
• Limited growth potential: you don’t rise as much if the company takes off

There are interesting variants: cumulative (if the company doesn’t pay dividends, they accumulate for later), convertible (you can convert them into common stocks under certain conditions), and redeemable (the company can buy them back).

Who Should Buy Preferred Stocks?

People nearing retirement, or anyone needing predictable cash flow now. If you seek security over growth, these are your best option.

Comparative Table: Preferred vs Common Stocks

The Impact of Market Conditions

An interesting real-world fact: the S&P U.S. Preferred Stock Index fell 18.05% over a five-year period, while the S&P 500 (which mainly includes common stocks) rose 57.60%. This demonstrates how preferred stocks tend to suffer more in rising interest rate environments, as their fixed dividends become less attractive compared to other investments.

Conversely, during periods of economic growth, common stocks tend to soar because everyone wants to participate in corporate success.

Types of Preferred Stocks You Should Know

• Cumulative: Unpaid dividends accumulate and must be paid later
• Non-cumulative: If dividends are not paid, they are simply lost
• Participating: Dividends are linked to the company’s actual results (more than fixed)
• Convertible: Allow conversion into common stocks in the future
• Redeemable: The company can buy them back under predefined conditions

Types of Common Stocks: Beyond the Basics

Not all common stocks are the same. Some companies issue multiple classes with different rights. This allows certain shareholders (often founders) to maintain disproportionate control of the company even with a smaller ownership stake.

There are also common stocks without voting rights, which simply give you a share of profits without a voice in decisions.

How to Buy Preferred and Common Stocks

If you’ve decided which type to buy, here is the process:

1. Choose a regulated broker: Make sure it is authorized and trustworthy
2. Open an account: Fill in personal details and make your first deposit
3. Research the company: Analyze its numbers, sector, future prospects
4. Place your order: You can make “market” orders (current price) or “limit” orders (price you set)
5. Consider CFDs: If your broker offers them, you can trade contracts for difference without owning the stocks

Investment Strategy According to Your Profile

If you’re young and risk-tolerant: Build a portfolio mainly of common stocks. Time is on your side to recover from downturns.

If you’re in capital preservation stage: Lean towards preferred stocks. You need secure income now more than future growth.

If you seek balance: Diversify by combining both. This mix reduces risk while maintaining exposure to growth.

The Key Data That Changes Everything

Looking at the S&P U.S. Preferred Stock Index, which accounts for about 71% of the preferred stock market in the U.S., we see its real relevance. But its underperformance compared to the S&P 500 in recent periods reflects an uncomfortable truth: in bull markets, preferred stocks lag behind.

This means that if the market is rallying, you would have gained much more with common stocks. But if the market falls, preferred stocks suffer less. It’s the classic risk-return trade-off.

Conclusion: Your Choice Depends on You

Preferred and common stocks are not better or worse; they are different tools for different objectives. The predictable dividends of preferred stocks appeal to those needing income today. The growth potential of common stocks attracts those who can wait.

The key is to understand your financial situation, time horizon, and risk tolerance. Then, choose the strategy that aligns with those factors. And if you still have doubts, remember: diversifying between both is always a solid option.