Recently, I was reviewing the fundamental differences between common and preferred shareholders, and the truth is that many investors are not clear on this distinction. It’s basic but crucial if you want to build a meaningful portfolio.

Here’s how it works: when you invest in a company, not all shareholders have the same rights. A company can issue two main types of shares, each with very different characteristics. Common and preferred shareholders operate under completely different rules, and that directly impacts your returns and the control you have over the company.

Let’s start with common shares, which are the most well-known. These give you voting rights at the meetings, so you can influence important decisions like electing directors. The dividend you receive varies depending on how well the company performs, meaning you earn more in good years but might receive nothing in bad years. In case of bankruptcy, common shareholders are last in line: creditors are paid first, then bondholders, then preferred shareholders, and only then you. The advantage is that they have much greater growth potential, especially if the company takes off. They are liquid, easy to buy and sell, and attractive for those seeking long-term capital appreciation.

Now, preferred shares work differently. They generally do not have voting rights, so you lose influence over corporate management. But in exchange, they receive fixed dividends or dividends with a pre-established rate, which are often higher than those of common shares. There are interesting variants: cumulative preferred shares hold unpaid dividends for future periods, convertible preferred shares can be transformed into common shares under certain conditions, and redeemable preferred shares can be repurchased by the company. In liquidation, they are paid before common shareholders but after debt. The negative side is that they have lower growth potential and are generally less liquid.

The reality is that these two types of shareholders—common and preferred—respond to completely different investment strategies. If you are young and have a long-term horizon, common shares allow you to expose yourself to market volatility in exchange for potentially higher gains. If you are close to retirement or simply seeking predictable income, preferred shares are your ally: less excitement, more stability.

To give you a perspective on actual behavior, look at the contrast between the S&P 500 and the S&P U.S. Preferred Stock Index. The latter represents approximately 71% of the preferred stock market in the United States. Over a recent five-year period, while the S&P 500 rose 57.60%, the preferred index fell 18.05%. That nicely summarizes the difference: common shares rise with economic growth, while preferred shares suffer when interest rates rise because their fixed dividends become less attractive in comparison.

The smart strategy is diversification. Holding some common and preferred shares in your portfolio gives you the best of both worlds: potential growth plus steady income flow. If you’re just starting out, look for a regulated broker, carefully analyze the companies you’re interested in, and define whether your goal is growth or income. Some brokers even offer CFDs on these shares if you prefer not to hold them directly in your portfolio. The important thing is to understand that each type of share plays a different role in your investment strategy, and choose according to your risk profile and financial goals.