I always wonder why so many people enter the stock market without really understanding what common versus preferred shares are. It’s one of those details that can completely change your investment strategy.

Let’s see, when a company issues shares, not all are the same. That’s the first thing to understand. There are mainly two types circulating out there, and each has its own rules of the game.

Common shares are the most typical type you’ll find. Basically, they represent a portion of ownership in the company. If you buy these shares, you have voting rights at the meetings, which means you can influence important decisions like electing directors. You also receive dividends, but here’s the interesting part: those dividends vary depending on how well the company is doing. In good times, you might receive quite a bit. In tough times, maybe nothing. That’s the risk: higher risk, higher potential gain.

Then there are preferred shares. These are different. They don’t give you voting rights, so you lose influence over corporate management. But in exchange, you get more stable and predictable dividends, usually fixed or with a pre-established rate. If the company goes bankrupt, you have priority to recover your investment before common shareholders. It’s like a middle ground between investing in bonds and regular stocks.

What’s interesting is that there are variants. Cumulative preferred shares guarantee that if dividends aren’t paid in a period, they accumulate for later. Convertible shares allow you to exchange them for common shares under certain conditions. Redeemable shares can be repurchased by the company. Each one adapts to different strategies.

Now, which is better? It depends entirely on who you are as an investor. If you’re someone seeking long-term growth and can tolerate volatility, common shares are your game. They have high liquidity, you can sell quickly in main markets, and the potential for your investment to grow is considerable, especially if the company succeeds.

If you prefer stability and regular income flow, preferred shares are more your style. Many people in retirement or capital preservation stages prefer them precisely for that reason. You more or less know what to expect each period; there are fewer unpleasant surprises.

The liquidity of preferred shares is usually more limited, and you have restrictions on selling them. Also, the growth potential is lower because fixed dividends don’t benefit as much from the company’s good results. In contrast, with common shares, if the company grows, you grow with it.

Regarding risk, common stocks are more volatile. The price rises and falls with market conditions and the company’s performance. Preferred shares are more sensitive to interest rate changes, behaving more like bonds. Their risk is lower, but so are your returns, which are more predictable.

A good strategy is diversification. Mix both types according to your profile. If you have a long-term horizon, you can lean more toward common shares. If you’re closer to retirement, tilt the balance toward preferred shares. That way, you reduce risks and balance between potential growth and regular income.

To better understand how these assets behave in practice, look at the S&P U.S. Preferred Stock Index compared to the S&P 500. Over a recent five-year period, the preferred index fell about 18%, while the S&P 500 rose around 57%. That difference clearly shows how they react differently to changes in monetary policy and market conditions.

If you want to start investing in either of these types, the process is quite straightforward. First, choose a regulated and trustworthy broker. Open your account by completing personal and financial data. Then clearly define your strategy: study the company, its sector, its numbers. Finally, execute your order, choosing between market orders or limit orders according to your preference. Some brokers also offer CFDs on these shares if you prefer not to hold them directly in your portfolio.

The key is to review your investment periodically and adjust if the market changes. That’s what separates successful investors from those who only lose.