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Non-Assessable Stock

A class of stock ownership where the stock owner is limited in their liability to the amount paid for the stock

What is Non-Assessable Stock?

Non-assessable stock is a class of stock ownership where the stock owner is limited in their liability to the amount paid for the stock. It means that in the instance of bankruptcy or a lawsuit, the shareholders cannot be found liable for any financial or legal troubles endured by the company they are investing in.

 

Non-Assessable Stock

 

Also, the shareholders cannot be forced to pay out extra funds to debtors or individuals who may be suing the company. The physical stock certificate issued for a non-assessable stock will include the words “fully paid and non-assessable” to represent the share type.

 

Summary

  • Non-assessable stock is a class of stock ownership where the stock owner is limited in their liability to the capital initially paid for the stock.
  • Holders of non-assessable stock in the instance of bankruptcy or a lawsuit cannot be found liable and do not need to pay funds to debtors or individuals who may be suing the company.
  • In the days when stock certificates were commonly issued, such types of shares would read “fully paid and non-assessable.”

 

How It Works – Non-Assessable Stock in the United States

Most stocks purchased on any major U.S. stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ, are non-assessable. It is of significant importance to both individual and institutional investors because if you, as an investor, were to purchase shares that traded on one of the exchanges, and it was discovered that later on the company committed fraud, as a shareholder, you could not be found responsible for that fraud financially. It would mean that you do not need to participate in any payout or settlement and can avoid being penalized for being a shareholder.

 

Importance of Non-Assessable Stock

Non-assessable stock plays a critical importance in inspiring confidence to bring active investors into the marketplace. If investors were to hypothetically be liable to amounts that were greater than the shares they own, they would be incredibly skeptical about investing in any company. It will damage liquidity in the marketplace and make it difficult for companies to find investors and raise capital.

Non-assessable stock allows the everyday investor an opportunity to invest in a wide variety of stocks traded on an exchange. It means that an investor won’t need to be savvy enough to spot potential fraud or looming bankruptcy, which can potentially expose all their other assets to loss.

Non-assessable stock also lets market participants and company directors know that corporate leadership can ultimately be found responsible for any misdeeds that they commit. It creates a clear division between those that casually own shares in a company as part of a mutual fund, exchange-traded fund, or stock portfolio and those who run the company and make decisions that have possible legal and financial outcomes.

 

Risks of Owning Assessable Stock

Inversely, if you were to purchase company shares that are considered assessable, you would be exposing yourself to unlimited liability in some instances. it can allow for your home to potentially be repossessed if you were to buy a single share in a company that perhaps is found to have committed fraud.

The risk-to-reward ratio of purchasing assessable shares is incredibly low, and as such, the market has largely removed them from circulation due to their non-popularity. Investing in the stock market would completely lose its popularity if it were found that teachers and retirees were having their homes repossessed because corporate executives committed fraud.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Institutional Investor
  • Limited Liability Company (LLC)
  • US Bankruptcy Code
  • Investing: A Beginner’s Guide

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