Complete Guide: Why Choose Between Common and Preferred Stocks to Define Your Profitability

When investors approach the stock market, they face a fundamental decision: which type of shares to invest their money in? The answer is not straightforward, because companies offer multiple options with radically different rights and characteristics. Understanding these differences is essential before investing a single peso.

The Reality of the Two Pillars of the Stock Market

Companies are primarily listed in two categories: common shares and preferred shares. Although both represent business ownership, they operate under completely different rules.

Common Shares: High Risk, Potential Reward

Common shares are the most popular investment vehicle. Their appeal lies in control and growth:

• Voting rights: Holders vote at meetings, influencing the company’s direction
• Variable earnings: Dividends fluctuate based on financial performance
• Greater volatility: Prices rise and fall according to market conditions and corporate results
• Bankruptcy position: They are last in line to receive compensation, after creditors and preferred shareholders

Common shares attract young investors and those with risk tolerance, willing to sacrifice secure income today for exponential growth tomorrow.

Preferred Shares: Predictable Stability

These shares occupy a hybrid space between bonds and equity, attracting those seeking security:

• No corporate voting: Holders do not influence business decisions
• Fixed or priority dividends: Pre-established rates, often cumulative
• Higher priority: In liquidation, paid before common shares
• Interest rate sensitivity: Behavior similar to fixed income instruments

There are sophisticated variants: redeemable (reacquired by the company), participative (linked to results), and convertible (transformable into common shares under certain conditions).

Breakdown of Rights: Who Gains What?

Investment Strategy: Which to Choose According to Your Profile?

For aggressive investors: Common shares are the option. The broad time horizon compensates for short-term fluctuations. They seek portfolio growth, not immediate income.

For conservative investors: Preferred shares offer a steady income stream without unpleasant surprises. Ideal for retirees or capital preservers.

Recommended mixed strategy: Combine both. Preferred shares serve a defensive role while common shares generate growth. This balances return and risk.

Practical Steps to Get Started

1. Choose a regulated broker: Reliable platform with access to both types of shares
2. Open your account: Complete verification and make an initial deposit
3. Research your goals: Analyze company fundamentals, sector, trends
4. Place orders: At market (current price) or limit (specific price)
5. Consider alternatives: Some brokers offer CFDs on shares, trading without directly owning them

Key advice: Diversify between both types. Monitor regularly and adjust as the market evolves.

Actual Market Behavior: Lessons from the S&P

A comparative analysis reveals a lot. Over the past five years, the S&P U.S. Preferred Stock Index (which represents approximately 71% of the US preferred market) fell 18.05%, while the S&P 500 rose 57.60%. This disparity clearly illustrates how common shares captured gains in bull markets, while preferred shares suffered pressure from interest rate changes.

This divergence is no coincidence: preferred shares, with fixed dividends, erode when interest rates rise (new bonds become more attractive). Common shares, on the other hand, benefit from business growth without this ceiling.

Conclusion: There Is No Single Answer

Choosing between common shares and preferred shares depends on your risk tolerance, time horizon, and income needs. Both serve different roles in a balanced portfolio. The key is to understand these differences before investing, recognizing that each type responds to specific financial objectives. Smart diversification between both categories is often the strategy that yields the best long-term results.