Common Shares vs Preferred Shares: A Guide to Choosing Your Investment

When we talk about the stock market, not all securities perform the same. Companies issue different categories of shares, each with its own rules of the game. Understanding the contrast between common and preferred shares is essential if you plan to invest in the stock market. Let’s break this down clearly.

The Big Contrast: What Sets Them Apart?

The reality is that there are two main protagonists in the equity world. Common shares are the classic format: they give you voting rights in corporate decisions, you have the right to receive profits (dividends), but everything varies depending on how the company performs. In bankruptcy, you are among the last to get paid.

Preferred shares, on the other hand, play a different game. You give up voting rights, but in return, you get more secure and predictable dividends. In case of financial trouble, you get paid before common shareholders. They are the refuge for those seeking stable income.

Common Shares: High Risk, High Potential

Common shares represent actual ownership in the company. Your main advantage is that if the company grows, your shares increase in value. Additionally, you participate in key decisions through voting at shareholder meetings.

The good side:

• High liquidity: You can sell quickly in major markets
• Revaluation potential linked to corporate success
• Influence in business management
• Variable depending on performance: You could earn a lot in good times

The problematic side:

• Extreme volatility depending on market conditions
• Inconsistent or null dividends during crises
• In liquidation, you wait behind all others
• Significant risk if the company fails

Ideal profile: Young investors with a long-term horizon, willing to withstand fluctuations.

Preferred Shares: Predictability Above All

These shares occupy a hybrid position, combining features of debt and equity. You don’t vote on anything, but you receive compensation for it: fixed or pre-established rate dividends.

Interesting variants include:

• Cumulative: Unpaid dividends are accumulated for later
• Convertible: Can be transformed into common shares under certain conditions
• Redeemable: The company can buy them back
• Participating: Dividends are adjusted based on financial results

Advantages:

• Predictable dividends, generally higher than common shares
• Priority in liquidation (though behind creditors)
• Lower risk and more stable returns
• Ideal in low-interest-rate environments

Limitations:

• Limited growth potential
• No voting rights, no decision-making power
• Restricted liquidity, hard to sell quickly
• Sensitive to interest rate changes
• Dividends may be suspended during severe crises

Ideal profile: Conservative investors nearing retirement, prioritizing cash flow over speculative gains.

Quick Comparative Table

How to Invest in Both

The process is similar for both types:

1. Choose your broker: Look for a regulated platform with a good reputation
2. Open an account: Complete personal and financial data, make an initial deposit
3. Research: Analyze company numbers, sector, competition
4. Place order: Choose between “market” (current price) or “limit” (your price)
5. Consider CFDs: Some brokers offer contracts for difference on these shares

Fundamental advice: Diversify. Mix both types to balance risk and return. Regularly monitor and adjust your strategy according to market changes.

The Numbers That Tell the Story

Comparing the S&P U.S. Preferred Stock Index to the S&P 500 reveals deep differences. Over a five-year period, while the preferred stock index declined 18.05%, the S&P 500 advanced 57.60%. This gap reflects radically different behaviors in a changing monetary policy context.

Preferred shares, representing about 71% of this segment’s market in the U.S., demonstrate their relevance but also their sensitivity to macroeconomic factors.

Your Strategy According to Your Profile

If you’re young and looking to build wealth: Common shares are your ally. Endure volatility, reinvest dividends, leverage time.

If you’re approaching retirement or need income now: Preferred shares offer stability, secure dividends, and less emotional stress.

The best option: A mixed portfolio. Combine variable returns with fixed income. This reduces overall risk exposure while maintaining growth potential.

What You Need to Know

The difference between common and preferred shares is not academic: it defines your profitability, your risk, and your peace of mind. Each serves different objectives. Commons for those with patience and risk appetite. Preferred for those valuing predictability over speculation.

Choose according to your situation, risk tolerance, and time horizon. There is no better than the other, only the one that best fits you.