Choosing the wrong stock type means you've already lost half of your investment

Many investors make the same mistake when entering the stock market: not knowing what to buy. In fact, que son acciones comunes and preferred stocks (acciones preferentes) are two seemingly similar investment tools that hide completely different risk-return logic behind them. Choosing the wrong one is like using the wrong tool.

Two types of stocks, two completely different game rules

A listed company typically issues two main types of stocks, but they differ greatly in dividends, voting rights, and risk bearing.

Core features of Common Stocks (Acciones Comunes):

• Have voting rights in company decisions
• Dividends are variable and linked to company performance
• Paid last in bankruptcy
• Price fluctuations are large, but growth potential is also high

Core features of Preferred Stocks (Acciones Preferentes):

• Basically no voting rights, you just collect dividends
• Dividends are fixed or distributed according to a preset ratio
• Have priority in bankruptcy, can get money back earlier
• Price is stable, but with a clear ceiling

These two stocks are like a bold entrepreneur and a conservative financial manager—one wants to take a big risk, the other just seeks stable income.

The truth about preferred stocks: the cost behind stability

Preferred stocks look attractive, especially when interest rates are low. You can lock in a fixed dividend rate without worrying about losing dividends if the company makes a loss. But this stability comes at a cost.

First, although preferred dividends have higher priority, their growth space is limited. You can’t earn the dividends from rapid company growth. Second, preferred stocks are extremely sensitive to interest rate changes. When the central bank raises rates, the attractiveness of preferred stocks declines, and their prices fall—something many people didn’t anticipate.

There’s also an invisible cost: poor liquidity. Preferred stocks are not as easy to sell as common stocks, and some even have buyback restrictions, making quick cash-out difficult.

The allure and risks of common stocks

The appeal of common stocks lies in growth potential. If you pick the right company, a 100% profit increase could double your stock price. But conversely, if the company’s performance declines, your dividends can be cut immediately, or even eliminated. That’s the price of common stocks—high returns come with high volatility.

Market data says it all. For example, in the US market, the S&P 500 (mainly composed of common stocks) rose 57.60% over the past five years, but the S&P U.S. Preferred Stock Index actually fell 18.05%—a gap of 75 percentage points. What’s behind this? Rising interest rates make fixed-dividend preferred stocks less attractive, while common stocks benefit from economic growth and corporate profit expansion.

Practical tips: how to choose the stock type that suits you

To make the right choice, ask yourself four questions:

1. How long is your investment horizon?
Short-term seeking stability? Preferred stocks might be more suitable. But if you have an investment period of over 10 years, the growth potential of common stocks is worth the risk.

2. How much volatility can you tolerate?
If a 20% drop in your account in a month keeps you awake at night, avoid common stocks. Preferred stocks may also fall, but the magnitude is much smaller.

3. Do you need regular cash flow?
Retired and relying on dividends for living? Preferred stocks’ fixed dividends are more reliable. Still accumulating wealth? Reinvest profits and pursue growth.

4. What is your risk appetite?
This is the most fundamental question. Aggressive investors should allocate more to common stocks; conservative investors should do the opposite.

Diversification is king

Don’t go to extremes. The truly smart approach is a mixed allocation. For example, a near-retirement investor could use a 70% preferred stock + 30% common stock portfolio, ensuring stable income while sharing economic growth dividends. A 30-year-old young person could do the reverse, with 80% common stocks + 20% preferred stocks as a risk buffer.

The specific steps are simple:

• Choose a reputable brokerage platform
• Complete account verification and fund deposit
• Analyze the fundamentals of the companies you want to invest in
• When placing orders, choose market or limit orders based on market conditions
• Develop a habit of regular review and adjust your portfolio according to market changes

What the market is teaching us

That set of data (57.60% vs -18.05%) actually reveals a deeper truth: during economic growth cycles, those who take risks will earn higher returns. But this doesn’t mean preferred stocks aren’t worth buying—they meet the needs of certain investors. The key is matching the investment to your actual situation.

Preferred stocks account for about 71% of the US stock market, indicating many investors need this stable tool. But at the same time, the growth of common stocks proves that investors willing to accept volatility indeed achieve more substantial returns.

Your choice should be based on who you are, not on short-term market performance. That’s the mark of a mature investor.