I've noticed that many new investors do not fully understand the difference between common and preferred shares, and that can cost them money. So I decided to delve into this because it is really fundamental if you want to invest wisely.

Look, when we talk about common and preferred shares, we are talking about two completely different ways of owning a company. Common shares are the most well-known, the ones we all imagine when we think of the stock market. They give you voting rights at shareholder meetings, which means you have a voice in important decisions like electing executives. The trade-off is that your dividends vary depending on how well the company performs, and in case of bankruptcy, you are among the last in line to recover your money.

Preferred shares work differently. Here, you sacrifice voting power, but in return, you get more stable and predictable dividends, almost like a fixed income. In a liquidation, you have priority over common shareholders, although creditors and bondholders come first. It’s an interesting balance between debt and equity characteristics.

There are variants within each type. In preferred shares, there are cumulative (where unpaid dividends accumulate), convertible (which you can exchange for common shares under certain conditions), and redeemable (which the company can buy back). In common shares, there are also multiple classes with different voting rights, allowing certain groups to maintain disproportionate control.

Now, here’s where it gets interesting for understanding the real market. Look at the numbers of the S&P U.S. Preferred Stock Index versus the S&P 500 over the last five years. The preferred index fell 18.05% while the S&P 500 rose 57.60%. That’s no coincidence. Preferred shares are sensitive to interest rate changes because their fixed dividends lose appeal when rates go up. It’s almost like comparing bonds with growth stocks.

For aggressive investors seeking long-term growth, common shares are the way to go. You accept volatility in exchange for potential real appreciation. But if you are in capital preservation or near retirement, preferred shares offer a more predictable income stream and less stress from market fluctuations.

The smart strategy here is diversification. Combine both types according to your risk profile and time horizon. If you have time, you can afford more common shares. If you need regular income, preferred shares make sense. The S&P U.S. Preferred Stock Index accounts for approximately 71% of the market for preferred shares traded in the United States, so it’s an important segment you shouldn’t ignore.

If you want to start investing in common and preferred shares, the process is straightforward. Find a regulated and trustworthy broker, open your account, carefully analyze the company you’re interested in, and execute your order. You can choose market or limit orders depending on your strategy. Some brokers also offer CFDs on these shares if you prefer not to hold the titles in your portfolio.

The key is to understand that common and preferred shares serve different purposes in your portfolio. It’s not that one is better than the other; each fits a different investor profile. The market numbers clearly demonstrate this.