I recently reviewed my portfolio and realized something that many investors overlook: not all stocks are the same. It turns out that when we talk about common and preferred shares, we are dealing with two quite different worlds, and understanding this can completely change your investment strategy.

Most people think that a stock is just a stock, period. But companies mainly issue two types, and each has very different characteristics. Common shares are the most traditional, the ones you probably have in mind when you think of the stock market. They give you voting rights at the meetings, which means you have a voice in important company decisions. The downside is that your dividends depend directly on how well the company performs, so they can vary quite a bit or even not be paid during tough times.

Now, preferred shares work differently. This is where it gets interesting. You don’t have voting rights, so your influence on corporate decisions is practically nil. But in exchange, you get something more valuable for certain investors: predictable and generally higher dividends. These are usually fixed or have a pre-established rate, and in many cases are cumulative, meaning if the company cannot pay them in a period, they accumulate for later.

The hierarchy in case of problems is also different. If a company goes bankrupt, preferred shareholders have priority over common shareholders to recover their investment, although they still rank below creditors and bondholders. This provides an extra layer of security that many investors value.

There are interesting variants within preferred shares. There are cumulative ones I mentioned, non-cumulative ones that do not hold overdue dividends, convertible ones that can be transformed into common shares under certain conditions, and redeemable ones that the company can buy back. There are even participative ones where dividends are linked to the company’s financial results.

From my experience, choosing between common and preferred shares really depends on your investor profile. If you are someone who can tolerate volatility and seeks long-term capital growth, common shares are your path. They offer greater appreciation potential and generally high liquidity in main markets. But if what interests you is generating regular and predictable income, especially if you are close to retirement or in a capital preservation phase, preferred shares make much more sense.

One fact that caught my attention: if you compare the S&P U.S. Preferred Stock Index with the S&P 500 over a five-year period, you clearly see the differences in behavior. The preferred index fell about 18%, while the S&P 500 rose 57%. This reflects how these instruments respond very differently to changes in interest rates and economic conditions.

Liquidity is also an important factor. Common shares are typically easier to sell quickly, while preferred shares often have sale restrictions and redemption clauses that can complicate things. That said, this also means there is less competition in that market, so sometimes you find interesting opportunities.

If you decide to invest in common and preferred shares, my recommendation is not to see this as an either/or decision. Diversification is key. Mix both types according to your time horizon and risk tolerance. Open an account with a regulated broker, carefully analyze the companies you’re interested in, and then execute your orders. You can trade at market or set limit prices according to your strategy. Some brokers even offer CFDs on these shares if you prefer not to hold them directly in your portfolio.

What matters is that you understand what you are buying. Common and preferred shares serve different purposes in a well-constructed portfolio. It’s not that one is better than the other; they are simply different tools for different objectives.