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Chapter 8: Problem 6

Evaluate the following argument: I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy \(\$ 10,000\) of Twitter stock, and the company ends up going bankrupt. Because as a stockholder I'm part owner of the company, I might be responsible for paying hundreds of thousands of dollars of the company's debts.

Short Answer

Expert verified
The argument is based on misunderstanding of how stock ownership works. The premise that a stockholder will be responsible for a company's debts in event of bankruptcy isn't correct. The maximum loss to a stockholder is the amount that has been invested. In this case, the maximum loss for the individual would be \(\$10,000\).

Step by step solution

01

Understand the Argument

First, review the given argument: 'I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy \(\$10,000\) of Twitter stock, and the company ends up going bankrupt. Because as a stockholder I'm part owner of the company, I might be responsible for paying hundreds of thousands of dollars of the company's debts.' This argument makes two main points, based on the fear of a company going bankrupt.
02

Analyze the Argument's Validity

Here, evaluate the argument's premises and its conclusion. The main premise is that if Twitter goes bankrupt after buying \(\$10,000\) of Twitter stock, the stockholder might be responsible for paying a large amount of the company's debts. This stems from the belief that as a stockholder, one is seen as part owner of the company. The next step is to evaluate if this premise is true, and if the resulting fear and caution is justified.
03

Evaluate the Premise

Check the premise of the argument, which states that as a stockholder, someone may be liable for the company's debts if it goes bankrupt. This premise is incorrect as per the Limited Liability feature of holding stocks. This feature protects the investments of a stockholder and makes them not responsible for covering the company's debts in case of bankruptcy. Therefore, the maximum loss for an individual investing \(\$10,000\) would be the invested amount itself, not any additional debt the company may incur.

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