Choose the right stock type: common and preferred shares - how to determine your investment returns

Investing in the stock market is not limited to just one option. Companies issue stocks in various forms, each with its own rights and risks. You can either gain voting rights and growth potential or opt for stable dividend income — this is the core difference between common and preferred shares. Understanding the characteristics of these two types of stocks is the first step in developing a sound investment strategy.

The Fundamental Difference Between the Two Types of Stocks

Common shares are the most common form of stock. When you purchase this type of stock, you become a partial owner of the company, with voting rights and a share in the company’s growth profits. But this double-edged sword also means higher risk — when the company performs well, you earn significantly; when it performs poorly, dividends may decrease substantially or disappear altogether.

Preferred shares are a hybrid investment instrument, positioned between common stocks and bonds. Holders give up voting rights in exchange for priority to receive fixed or pre-set dividend rates, as well as priority in the event of company liquidation (though still behind creditors). This appeals to investors seeking stable cash flow.

Four Key Features of Preferred Shares

Fixed or Floating Dividends

The biggest selling point of preferred shares is dividend stability. Most often, dividends are fixed or float according to a preset rate, unaffected by the company’s annual profits. Even if the company faces difficulties, holders may still receive the promised dividends. More aggressive versions include “cumulative” clauses — if dividends are skipped in a given year, the owed amount accumulates and is paid out in future years.

Limited Growth Potential

The price appreciation of preferred shares is limited and mainly influenced by interest rate environments. When market interest rates rise, these stocks become less attractive (since their fixed dividends lose value); when rates fall, their prices tend to rise. This differs from common stocks — whose prices can double or even tenfold as the company grows.

No or Limited Voting Rights

Giving up voting rights is the cost of preferred shares. You cannot participate in major company decisions, such as board elections or restructuring votes. This isn’t an issue for passive income investors but can be a limitation for those wanting to participate in corporate governance.

Various Variants to Meet Different Needs

The market offers convertible preferred shares (which can be converted into common stock), redeemable types (company can buy back), and participating types (dividends linked to company performance). This flexibility allows issuers to attract investors with different risk preferences.

Why Common Shares Attract Growth-Oriented Investors

Common stockholders have voting rights and a say at shareholder meetings. This control is especially important for long-term holders — you can influence the company’s direction.

From a dividend perspective, common shares’ dividends fluctuate with company performance. Rapidly growing companies may not pay dividends at all, instead reinvesting profits into R&D; mature, stable companies might pay generous dividends. This uncertainty is coupled with high growth potential.

In terms of liquidity, common shares are generally far superior to preferred shares. You can buy and sell anytime on exchanges without restrictions from complex redemption clauses. This is crucial for investors needing to quickly adjust their portfolios.

But everything has two sides. In company liquidation, common shareholders rank last — creditors and preferred shareholders are paid first, often leaving common shareholders with nothing. Market volatility also directly impacts stock prices, which can lead to losses of 30% or more in the short term.

Data Speaks: Historical Performance Comparison

Looking at a five-year real case: the S&P 500 (mainly comprising common stocks) rose by 57.60%, while the S&P U.S. Preferred Stock Index (tracking preferred shares) declined by 18.05%. This might suggest common stocks perform better, but context is key — these five years saw rising interest rates, which suppressed the prices of dividend-paying assets.

If we look at a different period where interest rates declined over those five years, preferred shares would have performed better. This shows that both types of stocks adapt to different economic cycles.

Choosing the Investment Strategy That Fits You

If you are between 30-50 years old, with sufficient time and risk tolerance, common stocks are the better choice. You can withstand short-term fluctuations and benefit from long-term company growth. At this stage, mainly allocate to common stocks, supplemented with a small portion of preferred shares to stabilize the portfolio.

If you are approaching or in retirement, prioritizing cash flow over capital appreciation, preferred shares should be a core component. Fixed dividends can replace employment income and reduce sensitivity to market volatility.

The ideal approach is a mixed allocation. Young investors might allocate 70% to common stocks and 30% to preferred shares; those nearing retirement could reverse this ratio. This way, you can enjoy growth opportunities while maintaining income stability.

Building Your Investment Portfolio

First, choose a regulated, reputable broker to ensure the safety of your funds.

Second, thoroughly research the companies you’re interested in — review financial statements, industry position, competitive advantages.

Third, allocate the proportion of common and preferred shares based on your risk appetite.

Fourth, execute trades via market orders or limit orders. If supported by your broker, you can also trade these stocks using Contracts for Difference (CFD), which involves leverage but carries higher risk.

Final Thoughts

Common and preferred shares each have their advantages and disadvantages — there is no absolute winner. The key is to match your investment to your life stage, risk preference, and financial goals. Novice investors often make the mistake of chasing high returns while ignoring risks, or being overly conservative and missing growth opportunities.

Regularly review your portfolio and adjust your allocations based on market conditions and personal circumstances. Markets change, and your strategy should be flexible to find the right balance between common and preferred shares for you.