Caveat Emptor

What it is:

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

How it works/Example:

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 it Matters:

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.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.