What is a Consignment Stock?

Malcolm Tatum

"Consignment stock" is a term used to describe shares of stock that are legally owned by one investor but are held by a second party. Shares of this type are sometimes used in what is known as a just in time strategy, allowing for the transfer of the ownership just as the buyer chooses to make use of those shares. In the interim, stock options that are not used are warehoused and may be returned to the manufacturer.

Consignment stocks are held by one investor and are owned by another investor.
Consignment stocks are held by one investor and are owned by another investor.

The general concept of consignment stock makes it possible for investors to avoid immediate reception of the shares, and the need to account for those shares as part of the portfolio inventory. This in turn can ease tax requirements in certain countries, and also allows the investor the opportunity to quickly assume full ownership of the shares at just the right time, based on what is happening in the marketplace. In terms of vendor-management inventory, the buyer or customer is only invoiced once he or she actually uses the shares. At that point, the owner does begin to account for the shares and is free to hold or sell them, depending on how the investment figures into the investor’s plans.

It is important to note that the designation of consignment stock does not involve qualifying the type of shares held in this arrangement. The difference is not in type or performance but in the current status of how the owner is using those shares. This makes it possible to acquire a claim on the shares and have everything in place to gain full possession of those shares once the move becomes practical. In the interim, the fact that someone other than the owner is holding the shares helps to minimize the impact on the investment portfolio. In many instances, the owner may even allow the consignment to lapse, which frees the shares up for purchase from the manufacturer or broker by other investors.

In terms of volatility, there is no inherent difference between consignment stock and any other shares of stock. The stock that is currently being held on behalf of the owner may or may not carry much in the way of risk, depending on the financial stability of the manufacturer and the current pattern exhibited by the stock in the marketplace. For this reason, the designation of consignment stock should be viewed more as a stock strategy that some investors find very useful, and less as any type of identification that provides clues as to the potential of the shares themselves.

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