Action: What it is and how to choose between common and preferred

Do you really know what a stock is? Not all are the same, and this difference can significantly impact your investment strategy. Companies mainly issue two categories of stocks with completely different rights and characteristics: common and preferred. Choosing between them depends on your risk profile and financial goals.

Understanding what a stock is: common vs preferred

A stock represents a share of ownership in a company. But here’s the important part: what exactly is a stock depends on its type. Common stocks offer voting rights and higher potential gains, while preferred stocks guarantee predictable income but without corporate influence.

Common stocks: for those seeking growth

Ordinary stocks are the most common type in markets. If you own a common stock, you have:

• Voting rights in important corporate decisions
• Variable dividends that depend on the company's performance
• Significant appreciation potential if the company grows
• Lower priority in case of bankruptcy (ahead of creditors and preferred shareholders)

The main appeal is capital growth. During periods of economic expansion, these stocks can multiply in value. However, they also face higher volatility: in times of uncertainty, prices can plummet.

Preferred stocks: for those seeking stability

Preferred stocks operate in a different league. They are the bridge between common stocks and bonds. Their characteristics:

• No voting rights (you do not participate in decisions)
• Fixed dividends or with a pre-established rate, more predictable
• Priority in liquidation if the company goes bankrupt (before common stocks, after debts)
• Lower growth potential compared to common stocks

These stocks attract conservative investors who need a steady income stream. Dividends accumulate if not paid in a period, ensuring future compensation.

Types of preferred stocks: key categories

Within preferred stocks, there are variants that expand your options:

• Cumulative: unpaid dividends are recovered in future periods
• Non-cumulative: lose rights to unpaid dividends
• Convertible: can be converted into common stocks under certain conditions
• Redeemable: the company can buy them back in the future
• Participating: dividends are directly linked to financial results
• With protection: include clauses for specific events

Rights and priorities: the payment hierarchy

When a company distributes profits or faces liquidation, there is an order of priority:

1. Creditors and bondholders (first in line to recover money)
2. Preferred shareholders (second in line)
3. Common shareholders (last, without guarantees)

In dividends, preferred shareholders have a clear advantage. If the company can only pay one dividend, they receive it first. Common shareholders only get dividends if there is surplus cash flow.

Comparative table: key differences

| Aspect | Preferred Stocks | Common Stocks | |--------|---------------------|----------------| | Voting rights | None | Yes, in corporate decisions | | Dividends | Fixed or pre-established rates | Variable depending on profitability | | Payment priority | Before common stocks | After preferred stocks | | Growth potential | Limited | High, linked to volatility | | Risk | Low, predictable returns | High, subject to fluctuations | | Liquidity | Generally limited | Potentially high in main markets | | Corporate influence | None due to restrictions | High if traded on main markets |

Sensitivity to interest rates: a critical factor

Preferred stocks behave like bonds in response to interest rate changes. If rates rise, their prices tend to fall because their fixed dividends become less attractive. Common stocks, although also affected, respond more to corporate profitability than external rates.

This explains why the S&P U.S. Preferred Stock Index fell 18.05% over five years, while the S&P 500 grew 57.60%. During that same period, restrictive monetary policy favored common stocks over preferred stocks.

The S&P U.S. Preferred Stock Index accounts for approximately 71% of the traded preferred stock market in the United States, reflecting the segment’s size.

How to start investing in stocks

If you want to buy common or preferred stocks, follow these steps:

1. Choose a regulated platform
Look for a broker with verifiable licenses and good reputation.

2. Open your account
Complete identity verification and financial data. Make an initial deposit.

3. Define your strategy
Research the company: analyze its numbers, sector, competition, and outlook.

4. Execute your order
Choose between market orders (current price) or limit orders (specific price).

Bonus: some brokers offer CFDs on stocks, allowing you to trade without owning the stock directly. Check availability and liquidity.

Strategy based on your investor profile

Your choice between common and preferred stocks should align with your financial situation:

For young or high-risk investors:
Common stocks are ideal. They have a long horizon to recover from market dips and require capital growth. Volatility is an opportunity, not a problem.

For near-retirement or conservative investors:
Preferred stocks fit better. They prioritize regular income over spectacular growth and aim to reduce risk exposure. The predictable dividend flow is valuable at this stage.

Optimal strategy: diversification
Mix both types in your portfolio. Adjust the percentage according to your age and goals. For example: at age 30, 80% common and 20% preferred; at age 55, invest 50-50.

Real performance: data that matter

Historical comparisons between indices reveal different behaviors. Over five years of monetary policy changes:

• The S&P U.S. Preferred Stock Index declined 18.05%
• The S&P 500 increased 57.60%

This gap shows that in rising rate environments, common stocks outperform preferred stocks. But in low-rate periods, preferred stocks can shine.

Conclusion: choose according to your needs

Now that you know what a common and preferred stock is, the decision is yours. There is no "best" stock, only the right stock for your situation. Aggressive investors thrive with common stocks; conservative ones find peace with preferred stocks. The smart move is to adjust your portfolio to your current life and review it periodically as the market evolves.