Table of contents
Introduction
Guaranteed rate stock, commonly called guaranteed dividend stock is an investment tool for those investors who want a fixed dividend rate with a guarantee. The questions that arise are: Can there be a guarantee of anything in the stock market? Is there any share in the stock market that will give an investor a guaranteed return? The answer is negative but a guaranteed stock does offer fixed dividends to its shareholders even if they have to involve a third party for added security.
Keep reading to explore the benefits of investing in guaranteed stocks and uncover how they are safer than other investment options.
What is a guaranteed stock?
A guaranteed stock or a guaranteed rate stock is a form of common stock majorly utilised by railroads and public utilities. These stocks are used when a company is unable to pay dividends or is in danger of ending up in a situation where they will not be able to continue paying dividends.
In this case, a third party must step in to vouch for a party unable to ensure dividends. By maintaining a guaranteed stock or a complete inventory supply, a firm gains a competitive edge over those with limited product availability. However, there are two parts of this definition:
- Guaranteed Dividends: Guaranteed stocks are a type of equity investment that entitles a holder to fixed dividends on common stocks. The issuing company guarantees these dividends and offers their investors a stable source of income.
- Guaranteed Inventory: In the second sense, guaranteed stocks refer to the physical inventory of a company. This inventory includes commonly bought items a company consistently stocks for prospective investors to buy. This ensures a reliable supply of essential products and smooth business operations.
Types of guaranteed stocks
Here are four main types of guaranteed stocks:
- Traditional guaranteed rate stock: These are low-risk stocks offering a fixed return for some time. Investors receive their principal amount at the end of the term irrespective of the market conditions.
- Equity-linked guaranteed rate stock: These stocks offer higher returns than traditional ones but the performance is based on the equity index and the underlying stocks.
- Principal-protected notes: These stocks offer capital preservation as they are linked with a specific index. This ensures that the initial investment is protected even if the index falls beyond a certain level.
- Guaranteed investment certificates: GICs are issued by financial institutions. A fixed rate of return is guaranteed over a period and so is the investor’s principal investment.
Guaranteed stocks are different from the basic preferred stocks as the involvement of a third party ensures payment is guaranteed in case of bankruptcy. Banks or corporations are guarantors of these dividends and have the authority to finalise the prices of these stocks.
3 Features of Guaranteed Stocks
- Less volatile:
As compared to common stocks, guaranteed stocks have lesser volatility to market movements. This mostly happens when stocks are issued for developmental and infrastructural projects. Therefore, market volatility will have very little impact and the stocks will remain unaffected by peaks and plunges in the share market.
- Ensure fixed dividends:
In guaranteed stocks, a third party will guarantee the payment of dividends to the investors. This party is not the original party. This third party essentially enters the situation to vouch for the company that cannot guarantee dividends.
- Highly priced:
Since the risk associated with these stocks is lower, the price of these stocks is generally high. The demand for such securities goes up and so does the price because of fixed or assured returns.
Benefits of investing in guaranteed stock
Here are some benefits of guaranteed stocks.
- Offered by large companies:
Guaranteed stocks are usually offered by large companies that have shown stable growth over a period. Mostly, guaranteed stocks are issued by utility companies, telecommunication companies and insurance companies.
- Consistent dividends:
A predictable income stream is guaranteed in these stocks owing to the participation of the third party. Regardless of market fluctuations and because of the involvement of a third party, guaranteed stocks come with an assurance that the dividends will be delivered consistently. These stocks are risk-mitigation tools for investors.
- Added layer of assurance:
Investing in such stocks assures that your investments are safe owing to the third-party participation. Guaranteed stocks protect the investors’ purchasing power and work as a safety net for companies in case of financial crisis as well as investors.
- Allows long-term growth:
Investors seeking to build wealth over some time can opt for these stocks. This investment option is ideal for long-term investors owing to their immunity to market fluctuations, thus, building the confidence of investors and influencing the market positively.
- Allows diversification:
Investing in a guaranteed stock enables an investor to spread out risks. With a diverse portfolio, you can include companies from various sectors to reduce the overall risk, make your investments safer and increase the chances of earning profits.
Conclusion
There are no guarantees and assurances in the stock market. Investments are governed by market fluctuations and uncertainty, even if an investor is purchasing guaranteed stocks. However, the participation of the third party can ensure stable and consistent returns that can work as a source of income for those seeking financial stability when the market is volatile. To learn more about different investment options, read blogs on StockGro.
FAQs
Guaranteed stocks are not as popular and common as common stocks which reduces their accessibility. Inventory holding costs go up and there is an increased risk of an inventory getting obsolete. This impacts the stocks.
Companies must plan properly and employ good forecasting tools. Flexible supply chain strategies, the latest technology for optimisation of inventory and building good relationships with customers and suppliers are other ways.
Yes. Mostly, companies going through a financial crisis offer guaranteed stocks to stabilise their finances. By getting guarantees from external sources for consistent payment of dividends, companies can make their investors feel confident and add to their capital at the same time.
Yes. Common stockholders are positioned at the bottom of the hierarchy, therefore, preferred stockholders will receive their dividends before common stockholders. Guaranteed stocks are a type of preferred stock which makes it a low-risk but expensive investment.
First, a business is not able to pay dividends altogether. The second condition is when a business is going through a financial crisis and will not be able to pay investors in future. Thirdly, a business is incurring losses constantly. Fourthly, if the business is making a profit but the amount is not enough to pay dividends. This can drive the company into losses in the long run.