What is the Role of a Guaranteed Stock in the Financial World?

Guaranteed stocks defined

Guaranteed stocks can mean a lot of things depending on how it is used. For example, it can mean be about a company’s physical inventory. Moreover, these are the items that people mostly avail. Hence, the company always keeps stock for customers who want to buy more.

On the other hand, guaranteed stocks can also be about the company and its dividends in the financial world. There are situations when a company cannot pay its dividends or is on the verge of not paying its dividends. In the latter case, a company may still be paying its dividends, but it might not be able to continue to do so because of severe financial issues and problems. Thus, they are not generating profits. When these situations arise, there is something that a company can do: involve a third party to ensure that the company will pay or continue to pay dividends. These situations do not happen that often but extra knowledge will never hurt.

In layman’s terms, a guaranteed stock is a preferred stock issued by entities like corporations who have another entity or other entities as a dividend guarantor. If the issuing guaranteed stock defaults, the guarantor or guarantors have the responsibility to pay the dividends to stockholders. The most common types of guaranteed bonds are from the railroad or public utility companies. They usually have a higher market price against non-guaranteed ones because there is a lesser risk. The final market price of the guaranteed stock depends on the guarantor’s financial and credit history.

Who gets their dividends first?

It is an entirely different issue with standard preferred stocks. Standard preferred stocks are most likely guaranteed even when the worse situation comes to worst, like bankruptcy. There is somewhat like a hierarchy with the people who receive the dividends first. Of course, the preferred stockholders will be the priority instead of the common stockholders. Furthermore, the common stockholders will need to wait to receive their dividends until the preferred stockholders have their full payment.

In worst situations like bankruptcy, where an asset liquidation is also needed, there is also a sequence of people who receive the payments. First comes the creditors, secured creditors, bondholders, and general creditors, succeeded by the preferred stockholders. The common stockholders will have to wait to receive their payments.

Be aware of the risks.

A company carrying a massive amount of inventory is also carrying huge costs on its shoulder. Hence, they may not be able to, let alone agree to shell out more money to get all the inventory guaranteed. If the inventory does not get sold for a specific time frame, it will go to surplus. Thus, the surplus will most likely come with discounts. There is even a possibility that it will not get sold at all.

Companies with guaranteed stocks or a complete inventory supply have a better edge than competitors who do not. Hence, orders can be fulfilled and delivered faster if customers have everything they need.