Investor Trading

While the stockholders assume all the risks of ownership, there are certain legal restrictions placed upon the extent of such risks. In essence, this simply means that the stockholders cannot lose more than the amount paid for their stock. As a further restriction, most common stocks of this day carry a printed legend to the effect that they are “fully paid and nonassessable,” which means that the corporation directors have no legal right to assess any additional amount against the individual shareholder to meet the needs of the corporation if it falls into financial distress. Liability originally meant that all shareholders were actually held liable for the entire indebtedness of the corporation, but the experiences of the Great Depression of the thirties showed this to be a complete fiction, since it meant nothing to hold people responsible for debts which could not be collected for lack of funds with which to pay them. Today the shareholders are only liable for the amount which they have actually invested, and this rule is practically without exception.
It must be realized that the stockholder is not a lender to the corporation in which he has purchased shares, nor do the stockholders actually own the assets; each of them is a part owner in the business and, as such, shares in its success or failure. In the event of liquidation, he is entitled to a just amount derived from the conversion of assets after all other claims are satisfied; mean-

while the corporation is the sole owner of its assets, for that is the purpose for which it was originally created as a legal entity.
Rights are special privileges which accrue to the holders of common stocks, although not all corporations include such “pre-emptive rights” in their charters. Where they are granted they may permit the stockholders themselves to have prior rights to buy any additional shares, usually at a price below the current market quotation, such rights being intended to prevent dilution of extent of interest. For example, we will suppose that the Quicker Freezit Corporation has 200,000 shares of capital stock outstanding and wishes to sell an additional 100,000 shares for use in expanding its facilities. It may offer this new stock for a limited period of time on the basis of one new share for each two old shares owned and at a price usually somewhat below the current market. The purpose of this arrangement is that the ownership shall not be disturbed as it rests with each stockholder. However, if a present stockholder should decide against making the purchase, then his rights may be sold for cash to an underwriting firm, or even on the open market. Should the issuing corporation be able to continue to maintain or even increase its profit margins upon the newly added shares as well as upon the old, then the purchaser of the new shares under “rights” is better off than before. Many of the larger and better known corporations have made extensive use of rights as a means of raising new capital funds; perhaps they feel that the best potential purchaser of new stock is the satisfied owner of stock already in public hands, who realizes that his interests are being safeguarded.