South Dakota Crop Insurance Practice Exam

Which of the following is NOT a characteristic of a stock company?

1. Returns profits to stockholders

2. Owned by policyholders

3. Shares are traded publicly

4. Managed by a board of directors

The correct answer is: Owned by policyholders

A stock company is an insurance company that is owned by shareholders. The shareholders are the individuals or entities that hold stock in the company. The primary characteristic of a stock company is that its profits are returned to stockholders, typically in the form of dividends. Shareholders may also see their investment grow through an increase in the stock's value. Ownership by policyholders is a defining feature of mutual companies, where the policyholders are the owners and may receive dividends based on the company’s performance. This contrasts with stock companies, where ownership lies with the stockholders and not the policyholders. Therefore, stating that a stock company is owned by policyholders is not accurate. Shares of a stock company can indeed be traded publicly, especially if the company is publicly held. This allows the ownership of the company to change as shares are bought and sold in the stock market. Management of a stock company typically involves a board of directors, which is responsible for overseeing the company’s operations and making key decisions. Overall, understanding these characteristics clarifies that ownership structure is a crucial distinction between stock companies and mutual companies.