What is a Guaranteed Stock?

T. M. Robertson
T. M. Robertson
Man climbing a rope
Man climbing a rope

Guaranteed stock is a term used in the financial industry to describe stocks that are backed by a third party. This third party makes a contract with the investor, guaranteeing that the stocks will be paid in the form of dividends. It's not common for corporations to issue guaranteed stocks, and in the majority of cases, these stocks are offered only in the railroad and public utility industries. Only under very specific circumstances is guaranteed stock offered by general corporations. Guaranteed stocks are often compared to guaranteed bonds because they are set up in a similar fashion.

When a corporation decides to issue stock, it basically has two categories of stock from which to choose. The corporation can issue preferred stock, or it can issue common stock. For the investor, each type of stock has its own unique set of risks and rewards. One major difference in the two is how the stocks will be paid. Unlike the investors who are issued common stock, the investors who are issued preferred stock are guaranteed dividends, and they will always be paid first, even when financial trouble arises, such as the company filing for bankruptcy.

Guaranteed stock, on the other hand, comes with the assurance that the dividend will be paid in full by the third party who is backing the transaction, regardless of whether the stock is classified as preferred or common. The issuing of guaranteed stock is fairly uncommon, but when it does occur, it's typically found in the financing of railroads and utility companies. Guaranteed stocks are issued by railroads when one railroad forms a contract with another for the lease of property. As part of the agreement, the railroad leasing the property will guarantee to pay the investor's dividends on the other railroads' stock.

On a much lesser scale, small corporations that are affiliated with larger corporations might issue guaranteed stock as a way to boost the price of their stock. In these instances, the larger corporation will guarantee the stock for the investors, making it easier for the smaller corporation to secure funds and increase its value. On occasion, some people misinterpret preferred stock to be the same thing as guaranteed stock. This is not the case, and the major difference between the two is that preferred stock dividends rely on the ability of the company to pay the money, and guaranteed stock will be paid regardless of the company's ability to pay.

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