What Is Guaranteed Stock?
Let me explain guaranteed stock to you directly—it's a term with two distinct meanings, one tied to dividends in the financial world and the other to inventory management. The more common usage refers to a rare form of common or preferred stock where dividends are guaranteed by one or more external companies. You'll see this with guaranteed stock issues, similar to guaranteed bonds, mostly in railroads and public utilities. That guaranteed dividend can drive up the stock's price.
On the inventory side, guaranteed stock means the physical items a company always keeps in stock for customers. These are your everyday purchases that the business ensures are available at all times.
Key Takeaways
- Guaranteed stock is a rarely used form of preferred stock, where a party other than the original company guarantees dividends will be paid.
- Guaranteed stock issues, like guaranteed bonds, have most often been used by railroads and public utilities.
- Guaranteed stock can also be a reference to the physical inventory that a company has available, particularly in the retail industry.
- With guaranteed stock, a third party must come in to essentially vouch for a party that cannot guarantee dividends.
- By having guaranteed stock, or a full supply of all of its inventory, a company can acquire an advantage over competitors who do not have all their products available.
Understanding Guaranteed Stock
In the financial context, I want you to understand that guaranteed stock comes into play rarely, when a company can't pay dividends or risks not being able to keep paying them. If a company isn't profitable, it simply can't distribute dividends. Even if it can pay now, serious financial troubles might jeopardize future payments. In these cases, the company can't promise ongoing dividends, so a third party steps in to guarantee them.
This setup differs from standard preferred stock, which is usually guaranteed even in bankruptcy. Preferred stockholders get priority over common ones—you won't see common dividends until preferred ones are fully paid. In bankruptcy liquidation, preferred stockholders are paid before common ones, but after creditors, secured creditors, general creditors, and bondholders.
Fast Fact
Here's a quick note: guaranteed stock is used infrequently, specifically when a company is unable to pay dividends or is unlikely to continue doing so.
Clarifying Guaranteed Stock Inventory
Shifting to inventory, there's risk in this approach because holding a large stockpile costs money. A company might not want or be able to afford keeping everything guaranteed in stock.
Plus, if items don't sell within a certain time, you end up with surplus that might need discounting, leading to losses. Worse still, especially with tech products, inventory can become obsolete and unsellable.
That said, maintaining guaranteed stock—a complete supply of all inventory—gives a company an edge over rivals without full availability. You, as a customer, get more options, better choices, and faster fulfillment and delivery.
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