Starting out
Limited liability
The rule that a shareholder can lose what they invested and no more, whatever the company owes.
How it works
If a company fails owing far more than it has, its creditors cannot pursue the shareholders for the difference. Your downside is capped at the amount you put in.
This is the legal invention that makes public equity investing possible for ordinary people. It is also why the upside is unlimited and the downside is exactly minus one hundred per cent — a shape that matters when thinking about position sizing.
Where it misleads people
Limited liability does not apply to leveraged positions. Trading on margin, shorting, or writing options can all lose you more than you put in, because the loss is yours rather than the company’s.
Related terms
- EquityA share of ownership in a company, giving you a claim on what is left after everyone else is paid.
- MarginBorrowing from your broker to buy more than your cash allows, using your portfolio as collateral.
- Short sellingBorrowing a security, selling it, and hoping to buy it back cheaper before returning it.
- ShareholderSomeone who owns shares in a company, and with them a vote and a claim on its profits.
More in Starting out
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.