Anyone with even a lick of experience in the stock market knows how inherently volatile it can be. It’s no secret that stock prices often fluctuate by the minute, if not second. After all, that’s how traders make their money. They capitalize on these market fluctuations to outperform passive investors.
While you might have heard about stock prices rising or falling, you’ve likely never heard about a stock losing all its value. Such situations are uncommon, rarely transpiring. However, does that mean that stocks cannot lose all their value? The answer’s a resounding no. Theoretically, a stock can lose all its value even if it happens once in a blue moon.
While it’s rare, some stocks have lost all their value in the past. Generally, a stock loses all its value when the company goes bankrupt.
It’s no secret that supply and demand determine a stock’s value in the market. Investors and traders affect these market forces through their actions. For instance, investors and traders are likelier to purchase a stock that shows promise because they believe it’ll continue appreciating in the future. On the other hand, a poorly-performing stock causes investors uncertainty, prompting them to offload it.
As a result, stock prices reflect a stock’s future profitability and growth. Companies that go bankrupt lose their value because they’ve become worthless. As a result, shareholders scramble to sell stocks in such companies as soon as possible. Unfortunately, they’re unlikely to have buyers because no one wants to put their hard-earned money into a financially destitute company.
In such instances, these stocks have no market demand. It’s worth noting that a stock’s market demand is intrinsically tied to the company’s value. Investors generally assess a company’s fundamental factors like price-to-earnings, earnings per share, etc. Once companies report poor fundamentals, the game changes.
Considering what you’ve read above, you might be thinking a company’s stock becomes worthless as soon as it declares bankruptcy. However, that’s not always the case. Organizations, especially large-scale, publicly-listed ones, have numerous invaluable resources, including assets, a recognizable brand image, and talented employees. The company can sell its assets to recoup some capital to pay creditors.
Likewise, these companies retain intrinsic value, allowing them to renegotiate deals with creditors. As a result, such companies will generally file for Chapter 11 bankruptcies to restructure the company. Doing so allows them to devise a repayment plan to pay back creditors. Companies will hold fire sales to pay creditors if they can’t renegotiate their existing deals.
Things become tricky when a company’s stock loses all its value. Generally, stock exchanges—like the NYSE and NASDAQ—will delist these stocks before their price reaches zero. The exchanges delist these stocks because they become worthless holdings for investors. They might continue to trade over the counter, but their trading volume significantly decreases due to the lack of visibility. Sometimes, traders and investors purchase stocks in bankrupt companies hoping to see the value rise.
It’s also worth noting that a stock’s price cannot decrease below zero. A bankrupt company, for instance, might have debts and liabilities exceeding assets. However, the company’s share price cannot dip below zero.
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