What Happens if a Company’s Stock Falls to Zero? (2024)

What Happens if a Company’s Stock Falls to Zero? (1)

The stock market can be a wild ride, and no one knows this better than investors of EV maker Nikola Corp (NKLA). The company's stock, once valued at US$67 per share, has plummeted in value and now hovers below US$1.

The question on the minds of many investors now is: what happens when a company's stock falls to zero?

After all, this has happened before where stocks of Enron and Lehman Brothers stocks fell precipitously to or close to zero before being delisted by the exchange. More recently, it happened to Silicon Valley Bank's parent SVB Financial Group andBed Bath & Beyond (BBBY) whose stock fell to 71 cents and 28 cents, respectively, before trading was suspended.

Here is a guide that explains why stocks may plummet to zero and what it means for investors:

When a Stock Hits Rock-Bottom

If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders.

“A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.

On rare occasions, a stock’s value could fall to zero due to regulatory freezes imposed on a company for illegal activity or regulation breaches.

A company’s stock may lose all its value for a variety of other reasons, such as poor management, weak financial performance, corporate fraud, or external factors such as economic downturns or industry disruption.

A publicly traded company exhibits several signs of distress well in advance of declaring bankruptcy.Some of these signs include “over-leveraged balance sheets, erratic share price trading and lots of insider sales, that is, management getting out,” says Sissons.

Significant and persistent declines in profit and revenue, negative auditor reports and debt rating agency comments are also key red flags, “although, on these latter two groups, there are many instances in which they failed to capture the obvious data,” he warns.

Impact on Investors After Bankruptcy

For investors who own shares in a company that goes bankrupt, the equity is wiped out, rendering their investment worthless.

Big stock exchanges set limits on how low a stock can go before they take it off their platform. Typically, if a stock's price stays under one dollar for a certain number of days, the exchange will remove it from their listings. Once delisted, it becomes an over-the-counter (OTC) stock that speculators can buy and sell on alternative exchanges.

“Once the failing companies fall below minimum trading thresholds, market makers do not make a market in the name,” says Sissons, adding that “you may see a name kicked from the big TSX board to the Venture Exchange.”

When a company goes bankrupt, debt investors switch to an "as converted" basis and essentially become owners of the company, Sissons notes. "As converted" basis refers to the situation where debt investors or bondholders have the option to convert their debt or bonds into equity shares of the company. This means that debt holders become equity shareholders, and “control of the firm then falls to the most senior debt instrument,” says Sissons.

Making Profits from Sinking Stocks

Is there an opportunity for investors to make money when a stock price goes south? According to Sissons, yes. "You can buy the bonds, which are likely trading at a discount," he says. "If the firm is capitalized as 50% debt and 50% equity, then the value of equity drops to zero, so the [holders of] 50% debt control the firm and convert [the debt] to equity. The company then becomes debt-free in effect."

Alternatively, investors can buy puts or short the company.

Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again. “Some upside can be re-captured at that time, says Sissons, but adds, “On balance, the equity investment is typically completely lost.”

Final Word for Investors

Are companies in some sectors more susceptible to going bankrupt than others? “In theory,” Sissons says, “any company can become bankrupt, but in practice, it's typically mature companies that have too much debt.”

He points out that “high-growth tech companies that run continuous net losses and then run out of money are also at risk,” citing Canadian telecom giant Nortel, which collapsedand went bankrupt in 2009.

If for some reason you end up owning stock in a company that is not on firm footing, it is critically important to understand the risk going in and ensure the investment still remains appropriate for your strategy.

Sissons’ advice is straightforward: “Do not buy companies with bad balance sheets. Review the auditor and debt rating comments and read research” and analyst notes.

There is much to monitor, though, and it’s a time-intensive process. “If that work is burdensome then employ a professional to assist with wealth planning,” he asserts.



What Happens if a Company’s Stock Falls to Zero? (2024)


What Happens if a Company’s Stock Falls to Zero? ›

When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.

What happens if a company's stock goes to zero? ›

If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.

What happens when a company's stock drops? ›

A decrease in implicit value, for instance, leaves the owners of the stock with a loss in value because their asset is now worth less than its original price. Again, no one else necessarily receives the money; it simply vanishes due to investors' perceptions.

What if you short a stock and it goes to 0? ›

If the shares you shorted become worthless, you don't need to buy them back and will have made a 100% profit. Congratulations!

What happens to options when a stock goes to zero? ›

For a put option buyer, the maximum loss on the option position is limited to the premium paid for the put. The maximum gain on the option position would occur if the underlying stock price fell to zero.

Can a stock be valued at zero? ›

Worthless securities will have a market value of zero as noted above. For a security to become worthless, it not only needs to have no value, but it needs to have no potential to regain value. For example, a company's stock might reduce in value to zero if the market fluctuates enough.

Can you write off a stock that goes to zero? ›

You can take a total capital loss on the stock if you own stock that has become worthless because the company went bankrupt and was liquidated.

What happens to stocks under $1? ›

The answer lies in Nasdaq rules that give companies generous grace periods for companies trying to get their share price back above $1. Under the rules, a company whose shares fall below $1 for 30 days gets a warning stating that it is noncompliant and has 180 days to get back above the threshold.

Have hundreds of stocks fallen below $1? ›

Hundreds of stocks have broken the buck this year, following a slump in the once-hot market for buzzy startups seeking rapid growth. As of Friday, 557 stocks listed on U.S. exchanges were trading below $1 a share, up from fewer than a dozen in early 2021, according to Dow Jones Market Data.

Who loses money when you short a stock? ›

Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.

Is shorting a stock illegal? ›

Though short selling has been legal for the past century, some short-selling practices have remained legally questionable. For example, in a naked short sale, the seller doesn't first track down the shares that are then borrowed and sold.

Do I lose my money if a stock is delisted? ›

Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.

What happens when a stock becomes worthless? ›

When one determines for tax purposes that a security has become totally worthless, an investment fund can take a capital loss under IRC Section 165. The resulting loss may be deducted as though it were a loss from a sale or exchange on the last day of the taxable year in which it has become worthless.

How much can a stock fall in a day? ›

The price range for equities might range from 2% to 20%. The stock exchange determines this range after reviewing the share's past price behaviour. The daily price range also considers the previous day's closing price.

How low can a stock go before being delisted? ›

For example, on the New York Stock Exchange (NYSE), if a security's price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.

When should you sell a losing stock? ›

An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.


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