What is Caveat Emptor?

Caveat emptor is Latin for let the buyer beware, meaning the buyer assumes the risk in a transaction.

How Does Caveat Emptor Work?

Garage sales are great examples of caveat emptor. Buyers purchase goods as is and have little or no recourse if those goods turn out to be defective. Thus, buyers are responsible for testing and examining those products before purchase.

However, in many cases outside of the garage-sale circuit (for instance, the purchase of a new car), several laws, regulations, and industry standards hold sellers to a higher standard by requiring them to offer adequate disclosure and take responsibility for defects that buyers may not note in a casual inspection.

Why Does Caveat Emptor Matter?

Caveat emptor, or the notion that the buyer takes the risk, is a fundamental principle of commerce. The resulting philosophy is that the buyer is responsible for knowing his rights and protecting himself.

After the 1929 market crash, Congress began to favor more disclosure (via the passage of the Securities Exchange Acts) over the notion of caveat emptor in the securities industry. However, buyers, particularly in the securities industry, are still responsible for their own decisions, and in many other areas of commerce, caveat emptor does not trump all -- sellers share responsibility for providing working products, sound advice, and transparent information to buyers.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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