Common Stock vs. Preferred Stock: Two Paths Investors Must Know

LiquidityWizard · 2026-01-06T12:12:45+00:00

Stock investments are divided into common stocks and preferred stocks. The former have voting rights but unstable returns, while the latter offer fixed income but no voting rights. Investors should choose based on their risk tolerance; common stocks are suitable for young people pursuing growth, while preferred stocks are suitable for those who prioritize stable income. Investment should be cautious, with regular evaluation of strategies and performance.

LiquidityWizard

2026-01-06 12:12:45

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When investing in stocks, many beginners only know to “buy stocks” but are not clear about what they are actually purchasing. In fact, not all stocks issued by companies are the same; common and preferred shares enjoy vastly different rights. Choosing incorrectly could turn a high-yield investment into a conservative financial strategy.

Two Types of Stocks, Two Ways to Play

Companies mainly issue two categories of stocks, each with different rules.

Common Stocks are traditional stocks. Holders have voting rights and can participate in major company decisions (such as electing directors). But returns are unstable—when the company profits, dividends may be generous; during losses, you might get nothing. In bankruptcy liquidation, common shareholders are last in line to receive payments.

Preferred Stocks follow a “stability route.” Their biggest feature is fixed or predetermined dividend payments, regardless of company performance. The trade-off is usually no voting rights. However, in bankruptcy, preferred shareholders are paid before common shareholders.

Simply put: common stocks are a “bet on company growth,” preferred stocks are “seeking stable cash flow.”

The Different Faces of Preferred Stocks

Preferred stocks seem simple but have multiple variants:

Cumulative Preferred Stocks: If the company doesn’t pay dividends in a given year, the owed dividends accumulate and are paid out later. Non-cumulative stocks do not; missed dividends are forfeited permanently.

Convertible Preferred Stocks: Can be converted into common stocks under certain conditions, suitable for investors seeking “insurance + growth.”

Redeemable Preferred Stocks: The company can buy back these stocks under specific conditions.

Participating Preferred Stocks: When the company earns big profits, dividends for these stocks increase accordingly.

The differences between common and preferred shareholders also show in liquidity: preferred stocks often have restrictions, such as sale limitations or special terms. But this is why their dividends are often more guaranteed.

Data Speaks: Historical Comparison

Looking at the real performance of the US market makes this clear. Over the past 5 years, the S&P 500 (mainly tracking common stocks) increased by 57.60%, while the S&P U.S. Preferred Stock Index only rose by -18.05%.

The big difference is due to interest rate policies. The fixed income nature of preferred stocks makes them sensitive to interest rate changes; when rates rise, their prices fall. Meanwhile, common stocks are more influenced by company fundamentals and market sentiment.

Which to Choose? It Depends on Who You Are

Who are common stocks suitable for?

You’re young, able to withstand market fluctuations, and even expect rollercoaster-like returns. Your goal is to accumulate wealth over 20 or 30 years, and you’re not afraid of short-term losses. These investors are usually in the upward phase of their careers, backed by stable income.

Who are preferred stocks suitable for?

You care more about steady annual income and prefer not to lose money. Maybe you’re close to retirement or have limited risk tolerance. You’re willing to give up the chance of quick riches for reliable dividend income.

A hybrid strategy also works: pursue long-term growth with common stocks, while using preferred stocks to provide cash flow buffers, making your portfolio more balanced.

How to Buy These Two Types of Stocks

The process is quite similar:

Choose a reputable broker—this is fundamental, directly related to your fund safety.
Open an account and deposit funds—submit identity info and complete your first deposit.
Do your homework—research the company’s financial data, industry outlook, and historical stock performance.
Place an order—select “market order” (buy at current price) or “limit order” (set your desired price).
Alternative: CFD Trading—if you want to speculate rather than hold, you can trade these stocks via contracts for difference (CFD), focusing on price movements without owning the actual stocks. But this method carries higher risk, requires broker support, and sufficient market liquidity.

The Mindset for Investing in Common and Preferred Shares

Common stock investors should adopt a long-term mindset. Don’t panic over short-term losses; market fluctuations are normal. Regularly review your portfolio but avoid frequent trading.

Preferred stock investors should pay attention to interest rate trends. Central bank policy changes directly impact your returns. Also, monitor the issuing company’s credit rating—after all, fixed income relies on the company not defaulting.

Final Advice

Don’t put all your eggs in one basket. Both common and preferred stocks have their advantages; combining them yields the best results. Find your own ratio based on your age, financial situation, and risk appetite.

The market changes, and so should your strategy. Regularly check your investment performance, and if it doesn’t meet expectations, optimize promptly. Remember, there is no perfect investment—only the one that suits you.

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