Invest in Common or Preferred Stocks: Which Is Your Best Option?

If you are new to the stock investment world, you have probably wondered why there are different types of stocks. The answer is simple: not all stocks perform the same. Companies can issue different categories, each with its own rights and characteristics. The two most important are common stocks and preferred stocks, and choosing one over the other can make a difference in your profitability.

First Things First: Understand the Main Difference

Before investing money, you need to know what you are buying. Common stocks give you decision-making power in the company (vote at meetings), but your earnings depend entirely on financial performance. Preferred stocks, on the other hand, sacrifice your voting rights in exchange for more stable and predictable dividends.

Think of it this way: if you buy common stocks, you are a partner with a voice in the company’s affairs. If you buy preferred stocks, you are more like a privileged creditor who receives regular payments.

Let’s Break Down Common Stocks: What Every Investor Should Know

Common stocks are the most popular in the markets. Why? Because they offer two attractive things: real growth potential and corporate control.

Your rights as a common stock owner:

• Vote on important decisions (election of executives, business strategy)
• Receive dividends, but only if the company makes money and decides to distribute
• In bankruptcy, receive what remains after all others (creditors, bondholders, preferred shareholders)

The Good: high liquidity (buy and sell quickly), unlimited profit potential if the company grows, access to main markets.

The Difficult: price volatility, risk of losing your investment, inconsistent or null dividends in bad times.

Common stocks attract aggressive investors, those who tolerate market fluctuations in exchange for possible large gains in the long term.

Preferred Stocks: Stability Above All

Preferred stocks are the opposite: safety over growth. You don’t have voting rights here, but you get almost guaranteed dividends.

Key features:

• Fixed or pre-established rate dividends (know exactly how much you will receive)
• Can be cumulative (if the company doesn’t pay one year, it owes you later)
• Priority in dividend distribution over common stocks
• In liquidation, recover money before common shareholders
• Sensitive to interest rate changes (like a bond)

Variants that exist:

• Cumulative: unpaid dividends accumulate
• Convertible: can be converted into common stocks under certain conditions
• Redeemable: the company can buy them back at its discretion
• Participating: your dividends increase if the company has extra profits

The Good: predictable income, less volatility, security in crises, ideal for retirees.

The Bad: limited growth potential, less liquidity, risk of dividend suspension in severe crises, no corporate decision-making power.

Quick Table: Common vs Preferred Stocks

Market Lesson: S&P 500 vs S&P U.S. Preferred Stock Index

A revealing fact: over the past five years, the S&P 500 (mainly common stocks) increased by 57.60%, while the S&P U.S. Preferred Stock Index (preferred stocks) fell by 18.05%.

What does this mean? That in bull markets, common stocks win by a landslide. But in crises, preferred stocks better curb declines. The S&P U.S. Preferred Stock Index accounts for approximately 71% of the preferred stock market in the U.S., showing the relevance of this segment.

Strategy According to Your Investor Profile

Are you young, working, and have 30+ years ahead?
Common stocks are your ally. You can withstand volatility and let compound growth work its magic.

Are you retired or close to retiring?
Preferred stocks are calmer. You need steady income flow, no market surprises.

Want the best of both worlds?
Diversify: mix common stocks for growth with preferred stocks for stability. Many professional investors do exactly that.

How to Start Investing in Common or Preferred Stocks

The process is straightforward:

1. Choose your broker: Find a regulated, reliable platform with good commissions
2. Open your account: Complete your personal and financial data, make an initial deposit
3. Analyze thoroughly: Don’t invest blindly. Review financial statements, sector, trends
4. Execute orders: Use “market” orders (at current price) or “limit” orders (your price)
5. Modern alternative: Many brokers offer CFDs on these stocks, allowing you to trade without physically owning the stocks

Key advice: always diversify, monitor your portfolio regularly, adjust when the market changes.

Final Reminder: What You Need to Remember

Common stocks and preferred stocks are not competitors, they are complements. Each serves a different purpose. Common stocks are for those seeking to build wealth long-term and tolerate volatility. Preferred stocks are for those needing regular income and security.

The market has shown historically: when everything is going well (S&P 500 +57.60%), common stocks dominate. But the stability offered by preferred stocks becomes valuable when the storm hits.

Your decision depends on when you need the money, how much risk you can tolerate, and what you seek: explosive growth or financial tranquility.