Definition
Guaranteed Stock is a type of stock where the dividends are guaranteed by a party other than the issuer, usually another corporation. This guarantee ensures a specific dividend yield regardless of the company’s profitability. This type of stock reduces risk for the investors, but it’s less common in developed markets because securities laws often restrict such type of guarantees.
Phonetic
The phonetic pronunciation of the keyword “Guaranteed Stock” would be: Guaranteed: /ɡerənˈtēd/Stock: /stɑːk/
Key Takeaways
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- Guaranteed Stock Definition: Guaranteed stocks refer to the shares that come with an assurance of specific returns. This guarantee is generally provided by an entity other than the issuer, such as the underwriting company, ensuring that investors receive a certain minimum value for their investment.
- Risk Factor: While guaranteed stocks may seem appealing due to their promised returns, there is always the risk that the guarantor may default on their commitment. Therefore, the risk associated with Guaranteed stocks is only as low as the credit risk of the guarantor.
- Legal Regulations: In many countries, offering guaranteed returns on stocks may be restricted or strictly regulated by financial authorities. This is to prevent potential scams and protect investors from fraudulent schemes presenting enticing guaranteed returns.
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Importance
Guaranteed Stock is an important term in business and finance as it refers to shares in a company for which dividends are guaranteed by another firm. This practice can incentivize investors to invest in a company, as it offers a secure guarantee for their investment. This security can also potentially increase a company’s share value and financial stability. The company guaranteeing the dividends typically has a strong financial background, thus reassuring investors of their returns. So, in essence, guaranteed stock is important because it promotes financial security and reliability, inspiring confidence in both current shareholders and potential investors.
Explanation
Guaranteed stock refers to shares that come with an assurance of a certain level of dividend payments, which are often underwritten by a third party, such as a parent corporation. Such stocks are utilized to boost investor confidence and encourage investment in a company that might otherwise seem risky or less appealing. It’s essentially a promise that the investor will receive a guaranteed return on their investment, which reduces risk and uncertainty. This guaranteed dividend payout provides stability desired by risk-averse investors.The primary purpose of guaranteed stock is to stimulate investment and enhance capital in entities that are striving to grow and expand but may still be viewed as risky investments. Furthermore, by offering guaranteed stocks, companies can secure a more diversified investor base, including those who are typically wary of market volatility or business uncertainty. It’s also applied as a strategic tool used to increase the attractiveness of a company during mergers or acquisitions. Therefore, this particular type of investment contributes to greater investor confidence, providing a safety net and incenting stakeholders to support a company’s growth.
Examples
“Guaranteed Stock” refers to shares issued by a corporation that come with a guarantee from a third party, mainly for dividends and sometimes for the principal value at liquidation as well. The purpose is to add an extra layer of security for potential stockholders, mitigating risks associated with market fluctuations.Here are three real-world examples:1. Berkshire Hathaway Inc. (Warren Buffet’s Company): Some of Berkshire Hathaway’s assets can be considered as guaranteed stocks. Buffett’s company is sitting on a mountain of capital, which acts as a buffer that makes it more likely that the firm can cover future losses on its investments, and provide shareholders with consistent dividend returns.2. Joint-Stock Company Transneft: This Russian company in the energy sector offers guaranteed stocks. The shareholders of this company receive guaranteed dividends from a portion of the company’s profit, and these dividends are usually substantial.3. Preferred Stocks: Corporations often issue preferred shares which can also be considered as forms of guaranteed stocks. Preferred shareholders get first dibs on dividends before common stockholders, often at a fixed rate. If the company were to be liquidated, preferred shareholders also have precedence in terms of getting a reimbursement of their initial investment. Please note that the term “Guaranteed Stock” is not commonly used in finance and the concept rarely applies due to the inherent risks involved in stock investing. It’s a company’s ability to minimize and manage these risks that gives their stocks an “unofficial” guarantee status.
Frequently Asked Questions(FAQ)
What is a Guaranteed Stock?
Guaranteed Stock refers to shares in a company that have their dividends guaranteed by another company. It is a type of equity investment that comes with a certain promise of return, usually from a parent or sister company.
What kind of companies typically issue Guaranteed Stocks?
Often, Guaranteed Stocks are issued by subsidiaries of larger corporations. The parent company or another subsidiary will guarantee the dividends to make the investment seem more appealing.
What is the purpose of a Guaranteed Stock?
The primary purpose of a Guaranteed Stock is to attract investors to a subsidiary company. The guarantee of dividends makes the investment less risky and can help the subsidiary company raise capital.
How is the dividend of a Guaranteed Stock determined?
The dividend of a Guaranteed Stock depends on its agreement. It could be a fixed amount or it could be tied to a reference point such as an index or interest rate.
Are Guaranteed Stocks risk-free?
While Guaranteed Stocks offer less risk due to the guaranteed returns, they are not completely risk-free. If the parent company fails to fulfil its financial obligations, the investors could lose their investment.
How are Guaranteed Stocks treated for tax purposes?
This can vary by jurisdiction, but typically the dividends received from Guaranteed Stocks are subject to taxes. It is advised to consult with a tax professional to learn more about specific tax implications.
Which factors should I consider before investing in a Guaranteed Stock?
Before investing in a Guaranteed Stock, you should consider the financial strength of the guaranteeing company, the conditions of the guarantee, the fixed return rate (if it applies), and how the investment fits within your overall investment strategy.
Where can I buy Guaranteed Stocks?
Guaranteed Stocks can typically be bought on the secondary market or directly from the issuing company. It’s advisable to speak with a financial advisor or broker to understand the best way to purchase these types of shares.
Related Finance Terms
- Preferred Stock: This is a type of stock that provides the holder with a higher claim on the earnings and assets of a corporation than common stock.
- Dividends: These are payments made by a corporation to its shareholder members. For guaranteed stocks, dividends are often fixed and guaranteed.
- Corporate Bonds: These are bonds issued by companies. The company is obligated to return the principal amount at maturity and make timely interest payments.
- Stock Market: The public market where buying and selling of stocks take place. Guaranteed stocks can be traded here.
- Investment Risk: The potential for investor loss. Guaranteed stocks generally come with a lower investment risk.
