Guaranteed Stocks: A Rarely Used Form of Preffered Stock

Last Updated: 28 Feb 2024

The common trading adage is, “there is no guarantee about anything in the stock market”. Then, what could be “guaranteed” in a guaranteed stock?

Guaranteed stocks apply to two aspects: dividend and inventory. This blog explains what is guaranteed stock, the most accurate guaranteed stock definition, and the working of a guaranteed stock and using guaranteed stocks, in detail.

Guaranteed Stock

A guaranteed stock is a type of stock that applies to dividends and inventory of a company. Usually, one can divide stocks into common stocks and guaranteed stocks based on ownership. The guaranteed stocks give a fixed amount of dividends every year. This is what makes the guarantee in a guaranteed stock. A guaranteed stock is also known as preferred stock

More about guaranteed stocks

Generally, a guaranteed stock issue, like guaranteed bonds, can be offered by the public sector entities for physical and social infrastructural projects. These stocks have an aspect of a guaranteed timely dividend as and when the quarterly earnings are announced.

Every time the dividend is issued, the stock price has the potential to rise. In a guaranteed stock, the issuer has to pay a dividend, even in the case of a default. Therefore, the degree of risk for guaranteed stocks is always lower than for non-guaranteed stocks. Furthermore, with the degree of risk being low, these stocks tend to be more costly.

The guarantor of these dividends is usually a bank or a corporation. They have the authority to decide the final price of these stocks.

What are the characteristics of a guaranteed stock?

1. Volatility

   Guaranteed or preferred stocks have lesser volatility to market movements thanCommon stock This is especially the case when these stocks are issued for development and infrastructural projects of various kinds.

   Market volatility can have very little impact the developmental activities. Therefore, these stocks might not be affected by peaks and plunges in the stock market.

2. Guaranteed fixed dividends

   Deriving from its name, a guaranteed stock offers fixed and guaranteed dividends every year. This is unlike the dividends provided by the common stocks. The dividends of the common stocks are hugely dependent on profits and a common stock company has a choice to issue or not issue a dividend.

3. Fixed dividends

   The common stock companies offer dividends only when there is a profit. However, a guaranteed stock business offers a fixed dividend every year. It is because there is a chance that the dividends provided by the common stocks can be higher because of a higher profit. They are more preferred by those looking for higher returns. The dividends offered by common stocks can be higher than the preferred stocks.

4. Lower risk

   The aspect of fixed and guaranteed returns reduces the element of the risk involved in this stock. The more stability in terms of returns, the lesser the risk.

5. Higher stock price

   As the risk involved in the guaranteed stocks is lower, the prices of these stocks are higher. The higher and lower comparison with risk and prices is with the common stocks.

Using guaranteed stocks

Generally, businesses use guaranteed stocks in one or more of the following conditions:

• They are incapable of paying dividends altogether.
• They are amid a severe financial crunch and cannot continue to pay dividends.
• The company is not earning any profits. Therefore, they cannot pay a dividend.
• The business is making a profit, but it is also facing a financial crisis and issuing a dividend can harm its business in the long run.

In either of the scenarios, the companies, tie-up with a corporation or a bank that could guarantee to pay dividends on their behalf.

Preferred stockholders versus common stockholders

One can either be a preferred stockholder of a company or a common stockholder. As a preferred stockholder, one can have more privileges than common stockholders. A preferred stockholder will be paid a dividend first, and then whatever is left is distributed among the other stockholders.

Even if the company becomes bankrupt, the company’s assets will be liquidated to pay the dividend to its preferred stockholders. That is why the meaning of the guaranteed stock involves preference and is thus also called preferred stocks.

A guaranteed stockholder is made payment even for the dividend that was cut earlier or missed.

A guaranteed stock thus pays fixed dividends every year to its shareholders using Stock market app. They have a lower risk compared to common stocks but are more expensive than them. This makes the guaranteed stock a better investment option for risk-averse investors.