Your ultimate guide to choosing between preferred and common stocks in 2024

The market reality is simple: not all stocks perform the same way. If you’re looking to invest in the stock market, you need to understand what each type offers you. Preferred and common stocks are two completely different paths to the same destination: growing your money. But the approach varies depending on your profile.

The breaking point: what truly separates preferred and common stocks?

Imagine you own a company. When you decide to issue shares to raise capital, you have options. You can offer investors decision-making power or guarantee them predictable income. That explains why common and preferred stocks exist.

Common stocks = risk + control

• Voting rights in corporate decisions
• Variable dividends based on company profits
• In bankruptcy, you recover money only if anything remains
• High growth potential (but with volatility)

Preferred stocks = income + security

• No voting rights at meetings
• Fixed or predictable dividends
• In bankruptcy, they receive compensation before common stocks
• Limited growth but more predictable

Deepening into preferred stocks: the conservative option

Preferred stocks are the middle ground between a bond and a stock. Technically, they are equity, but they behave like debt. Why? Because they offer fixed returns without obligating the company to return your money.

There are several types of preferred stocks:

• Cumulative: unpaid dividends accumulate for the future
• Convertible: can be transformed into common shares under certain conditions
• Redeemable: the company can buy them back
• Participating: dividends adjust according to the company’s results

The main benefit? If you’re a conservative investor seeking stable income, preferred and common stocks present a clear choice: choose preferred stocks and sleep peacefully.

Advantages vs disadvantages of preferred stocks

Pros:

• Higher and more stable dividends than common stocks
• Priority in company liquidation
• Less volatile in turbulent markets
• Ideal in low-interest-rate environments

Cons:

• No corporate voting rights
• Very limited appreciation potential
• Reduced liquidity (hard to sell quickly)
• Sensitive to interest rate changes
• Dividends may be suspended during crises

Common stocks: the path to long-term wealth

Common stocks are simpler but riskier. You buy a piece of the company and get two things: voting rights and variable dividends. Nothing guaranteed, but nothing limited either.

Within common stocks, there are variants:

• No voting rights: participate in profits but do not decide anything
• Multi-class: different types of shares with different rights

Advantages vs disadvantages of common stocks

Pros:

• High liquidity: quick buy and sell
• Significant growth potential
• Voting in corporate decisions
• Capital appreciation linked to the company’s success

Cons:

• Price volatility according to the market
• Uncertain and unpredictable dividends
• In bankruptcy, you are among the last to recover money
• Requires deeper analysis of companies

Direct comparison: preferred vs common stocks side by side

Data speaks: S&P 500 vs S&P U.S. Preferred Stock Index

Numbers tell the story. Over the past five years, with changing monetary policy, the S&P 500 (common stocks) rose 57.60%, while the S&P U.S. Preferred Stock Index fell 18.05%.

What does this mean? In bull markets, common stocks gain. In bear markets, preferred stocks better protect your capital. The S&P U.S. Preferred Stock Index represents 71% of the preferred stock market traded in the U.S., demonstrating its relevance.

Step-by-step: how to invest in stocks

1. Choose your broker: Find a regulated and reliable platform
2. Open your account: Complete personal and financial data
3. Define your strategy: Analyze the company (numbers, sector, prospects)
4. Place your order: Choose between “market order” (current price) or “limit order” (your price)
5. Consider CFDs: If your broker allows, you can trade without owning the stocks

Which to choose based on your investor profile?

You’re young (20-40 years): Common stocks are your choice. You have time to withstand volatility and grow with long-term appreciation.

You’re middle-aged (40-55 years): Mix. Combine 60% common and 40% preferred stocks for a balance between growth and security.

Approaching retirement (55+ years): Preferred stocks dominate your portfolio. You need predictable income flow and lower risk.

Key strategy: Always diversify. Don’t put all your eggs in one basket. Smart investors combine preferred and common stocks according to their life stage.

Final reflection

Preferred and common stocks are not rivals; they are complements. Your task is to identify where you fit on the risk-return spectrum. Do you want to sleep peacefully with fixed income? Preferred stocks. Do you want to build wealth for the long term? Common stocks. The ideal? A portfolio that mixes both, tailored to your age, goals, and risk tolerance. The market provides all the tools. You just need to choose which suits you best.