I've noticed that many people entering the investment world confuse common and preferred stocks quite a bit, so I wanted to share how these two things actually work.

Most companies issue two main types of shares, and although they seem similar, they are quite different in what they offer. Common stocks are the most well-known, the ones you see everywhere. They give you the right to vote on important company decisions, you can participate in profits if there are any, but here’s the important part: if the company goes bankrupt, you are at the end of the line waiting for your compensation.

Then there are preferred stocks, which operate differently. They generally do not allow you to vote, so forget about having a voice in corporate decisions. But in exchange, you get more stable and predictable dividends, and in case of bankruptcy, you have priority over common shareholders to recover your investment. It’s a trade-off: you lose power but gain security.

What’s interesting is that there are quite specific variants of preferred stocks. There are cumulative ones, where if the company doesn’t pay dividends in a quarter, those accumulate and are owed to you later. Also convertible ones, which you can transform into common shares under certain conditions. And redeemable ones, which the company can buy back whenever it wants. This makes them quite flexible depending on your strategy.

In terms of risk, common and preferred stocks play in different leagues. Common stocks have higher growth potential but also more volatility. They depend on the company’s performance and market conditions. Preferred stocks are more predictable, with fixed returns, but less exciting in terms of capital gains. That’s why conservative investors, especially those nearing retirement, prefer preferred stocks. Those seeking long-term growth go for common stocks.

One thing that always catches my attention is how they behave compared to indices like the S&P 500. If you look at the S&P U.S. Preferred Stock Index versus the S&P 500 during periods of interest rate changes, you clearly see the difference. While the S&P 500 can rise by 57%, the preferred stock index falls because fixed dividends become less attractive when rates go up.

For those wanting to start investing in common and preferred stocks, the basics are choosing a regulated broker, opening your account with your details, thoroughly analyzing the company you’re interested in, and then executing your order. Some brokers even offer CFDs on these stocks if you prefer not to hold them directly in your portfolio.

My personal advice: it’s not one or the other. Diversify. Mix common and preferred stocks according to your profile. If you’re 30 years old and have a long horizon, more common stocks. If you’re thinking about regular income soon, more preferred stocks. And review your portfolio regularly because the market changes and your strategy should adapt too. That’s what really makes the difference between investing well or just being in the market.