Preferred Shares vs Common Shares: Complete Guide to Decide Your Investment

In capital markets, not all stocks are the same. Public companies have the ability to issue multiple categories of equity securities, each with different rights and characteristics. Understanding the differences between preferred and common shares is essential to structuring a portfolio aligned with your financial goals.

Why Is It Important to Differentiate Between These Two Types of Shares?

The distinction mainly lies in how participation rights, periodic income, and priority in case of business dissolution are distributed. While one type offers decision-making influence, the other guarantees more stable cash flows. Choosing correctly depends on your investor profile and your profitability expectations.

Fundamental Characteristics of Common Shares

Common shares represent the most accessible and traditional form of equity participation. They are the mechanism through which small and large investors acquire a stake in the company’s assets.

Main rights:

• Voting power at shareholder meetings for key corporate decisions
• Right to receive dividends when the company generates sufficient profits
• Relative priority only after creditors and preferred shareholders in liquidation processes
• High transaction capacity in regulated markets

Profitability profile: Their appreciation potential is directly linked to the company’s financial performance and growth prospects. During economic booms, these securities can multiply. However, in contraction or sector crises, they can experience significant declines.

Structure and Functioning of Preferred Shares

Preferred shares occupy an intermediate position between pure equity and debt instruments. They are hybrid securities combining features of both worlds.

Main advantages:

• Generate predictable income through fixed or pre-established rate dividends
• Priority access to profit distributions over ordinary shareholders
• Greater security in capital recovery during business liquidations
• Controlled sensitivity to economic cycles

Key limitations:

• No voting rights in corporate decisions
• Limited potential for market value growth
• Lower liquidity compared to ordinary shares
• Frequent restrictions on transfer or mandatory redemption clauses

Specialized Variants of Preferred Shares

Within this segment, there are multiple modalities designed for different investor profiles:

• Cumulative: Accumulate unpaid dividends from previous periods, ensuring future receipt
• Convertible: Allow transformation into common shares under predetermined conditions
• Redeemable: The issuing company can buy them back at set terms and prices
• Participating: Link their income directly to net financial results

Practical Comparison: Differentiation Matrix

Step-by-Step Acquisition Strategy

To start buying preferred and common shares:

1. Select a regulated brokerage platform: Verify it is authorized by local and international supervisory entities
2. Open your trading account: Complete identity verification and make an initial deposit
3. Conduct fundamental analysis: Examine financial statements, competitive positioning, and the target company’s outlook
4. Execute your orders: Use market orders for immediate execution or limit orders to set your prices
5. Consider derivatives trading: Some brokers offer CFDs on shares, allowing exposure without direct ownership

Investor Profiles and Optimal Allocation

Growth-oriented investors: These market participants accept volatility as a requirement for capital appreciation. They have an extended time horizon and are in early or intermediate stages of wealth accumulation. For them, common shares are the ideal vehicle, offering exposure to economic expansion cycles.

Conservative or preservation-stage investors: Prioritize regular income flows over speculative growth. They often approach retirement or seek to reduce volatility. Preferred shares align perfectly with these needs, providing recurring income and lower market turbulence exposure.

Balanced diversification strategy: A sophisticated portfolio can combine both categories, maximizing the risk-return ratio according to economic cycles and personal expectations.

Historical Performance: The Case of the S&P 500 vs S&P U.S. Preferred Stock Index

Historical data reveal different patterns between these segments. During the period of monetary policy normalization (2018-2023), the S&P 500 appreciated by 57.60%, while the S&P U.S. Preferred Stock Index, which encompasses approximately 71% of the U.S. preferred stock market, declined by 18.05%.

This divergence illustrates how changes in interest rate environments impact these instruments differently. Preferred stocks, by their fixed income nature, become less attractive when benchmark rates rise. In contrast, common stocks benefited from corporate growth during that period.

Final Considerations for Your Decision-Making

Choosing between preferred and common shares should not be binary. A resilient portfolio incorporates both categories in proportions that reflect your risk tolerance, time horizon, and income expectations. Before committing capital, conduct a rigorous assessment of your specific needs and regularly review your strategy to adapt to changes in your circumstances or market conditions.