I just reviewed something that many beginner investors don't fully understand: the difference between common stocks and preferred stocks. And the truth is, it's essential if you want to know where your money is.

Most public companies issue two types of shares, each with very different characteristics. Common stocks are the most well-known, the ones people typically buy thinking about growth. But preferred stocks work in a quite different way, and depending on your investor profile, one could be much better than the other.

Common stocks give you voting rights at shareholder meetings, which means you have a voice in important company decisions. In exchange, your dividends fluctuate based on how well the company performs. In a bankruptcy, you are among the last to receive anything. But the potential for profits is much higher if the company grows.

Preferred stocks function almost like a hybrid between stocks and bonds. They do not give you voting rights, but in return, you receive more stable dividends, usually fixed or with a pre-established rate. In case of liquidation, you have priority over common shareholders. The trade-off is that your growth potential is more limited, and dividends can be suspended if the company faces financial difficulties.

There are variants of both. There are cumulative preferred stocks, where unpaid dividends accumulate for later payment; convertible stocks, which can be transformed into common shares under certain conditions; and redeemable stocks, which the company can buy back. There are also common stocks without voting rights or multiple classes, where each class has different rights.

If we look at the actual market behavior, the S&P U.S. Preferred Stock Index fell 18.05% over a five-year period, while the S&P 500 rose 57.60% in the same span. This clearly reflects the difference in volatility and return potential between the two types of investment.

For conservative investors, preferred stocks are more attractive because they prioritize predictable income and capital preservation. They are generally for people close to retirement or those seeking to diversify with something more stable. Those seeking long-term growth and able to tolerate volatility opt for common stocks, especially if they have a long time horizon.

If you want to start, the process is relatively simple: choose a regulated broker, open your account, carefully analyze the company you're interested in, and place your order. You can buy at market price or set a specific price. Some brokers even allow you to trade CFDs on these stocks without holding them in your portfolio.

The recommendation I always give is to diversify. Mix common and preferred stocks according to your risk tolerance, review your portfolio periodically, and adjust your strategy when necessary. It’s not complicated, but it requires that you truly understand what common and preferred stocks are before investing your money.