Recently, I was reviewing how stock investments actually work, and I was surprised to discover how many people confuse two completely different types: common stocks and preferred stocks.

Most think that all stocks are the same, but the reality is quite different. When a company issues stocks, it can do so in various ways, and each type grants completely different rights. It’s crucial to understand this before investing money anywhere.

Let’s start with the basics. Common stocks are the ones you probably know: they give you voting rights at shareholder meetings, you receive dividends (although they vary depending on how well the company is doing), and if the company goes bankrupt, you wait in line to recover some of your investment. The profit potential is high, but so is the risk. Prices fluctuate quite a bit.

Now, preferred stocks are something else. Here, you don’t have voting rights on corporate decisions, but in exchange, you get more stable dividends, usually fixed or predetermined. In case of liquidation, you have priority over common shareholders to recover your money. It’s like having a safer commitment with the company.

There are interesting variants of preferred stocks: cumulative ones hold unpaid dividends for later, convertible ones allow you to transform them into common stocks under certain conditions, and redeemable ones can be repurchased by the company. Each has its purpose.

What caught my attention is how these preferred stocks behave differently in the market. They are sensitive to changes in interest rates, so when central banks raise or lower rates, it directly impacts their value. It’s almost like having bonds but with stock-like features.

Who is each one for? If you’re looking for long-term growth and can tolerate volatility, common stocks are your path. But if you’re close to retirement or simply want predictable income, preferred stocks offer that peace of mind. Many conservative investors prefer them precisely for that.

An interesting fact: if we look at the S&P U.S. Preferred Stock Index versus the S&P 500 over the last five years, we see that the former fell 18.05% while the latter rose 57.60%. This clearly shows how they behave differently depending on the interest rate environment and monetary policy.

If you want to start investing in either of these types, the process is straightforward: choose a regulated broker, open your account, carefully analyze the company you’re interested in, and place your order. Some brokers even offer CFDs on these stocks, so you can trade without owning them directly.

My recommendation: don’t bet everything on just one type. Mix common stocks and preferred stocks to balance risk and return. Review your portfolio regularly and adjust based on how the market moves. Diversification remains the best strategy, especially when you understand well what you’re buying and why.