What happens if a stock goes to zero? | Titan (2024)

Table of contents

What happens if a stock goes to zero?

What it means for investors

What determines the price of a share?

What can cause a stock to lose value?

Who buys stocks that go to zero?

Examples of stocks that went to zero

How does a company become worthless?

Prevents a stock price from going to zero

What does it mean to you

Stock trading

What happens if a stock goes to zero?

Any financial advisor or professional investor will tell you the same thing: all investing has inherent risks. And when you buy individual shares – instead of investing in e.g. index funds or ETFs: Are any of your investments more likely to end up losing money? So what happens when a stock not only loses you money, but goes to zero and disappears completely?

What happens if a stock goes to zero?

When the price of a stock falls to zero, a shareholder's ownership in that stock becomes worthless.

Importantexchangeseffectively delisting shares when they fall below a specific price value. For example, the New York Stock Exchange (NYSE) will delist shares if the stock price remains below one dollar for 30 consecutive days.

A delisted stock loses the privilege of appearing on popular stock exchanges and therefore buying or selling that stock cannot be done through the usual methods. Instead, we look at the sharesfreely available(OTC) and displayed on a separate OTC message board. This message board is known as the "pink sheets" by speculators looking to trade for bargains on alternative exchanges.

If a stock can fall to zero, can it also fall below zero? In other words, can you lose more than you originally invested in a stock? As long as you don't borrow margin money from your broker to make your stock purchases, the answer to both questions is no.

What it means for investors

Volatility in the stock market is inevitable. If you choose to invest in this, you must be willing to accept a certain level of risk. It is also true that some stocks will suddenly drop and lose all their value. That said, whether an investor experiences a financial loss or gain in the event a stock hits zero depends on whether an investor is in a situationlong or short term position.

The average investor (i.elong-terminvestor) are usually devastated when their stocks plummet, but a falling stock can be good for a short-term investor. This is because they are trying to sell shares "short".

In a short sale, an investor borrows shares of a company and sells them, expecting the shares to fall in value, so that he can then buy the shares at a lower price, pay back the loan and keep the difference for himself as gain.

Shorting stocks is very risky. For example, if we take a $10 stock, the most an investor can lose if the stock falls is $10. But if you are short and the stock goes to $100, you lose $90. Hedge fund Melvin Capital closed its doors in 2022 after shorting its shares in AMC Entertainment and other "meme" stocks, only to watch those shares soar, ultimately causing billions in losses.

At Titan, we are value investors: we aim to manage our portfolios with a constant focus on fundamentals and an eye for enormous long-term growth potential. Investing with Titan is simple, transparent and efficient.

What determines the price of a share?

Supply-and-demand economics is the main driver behind what causes stock prices to rise and fall. For example, when demand is high, people buy shares, causing the price of the shares to rise. When demand for a particular stock is low, investors may choose to sell, causing prices to fall – sometimes at a dramatic rate.

Companies maintain demand for their shares by running reliably profitable businesses. But that's difficult, especially in a bad economy. Most startups fail and no company – no matter how established – will report higher revenues during every quarter of its existence.

What can cause a stock to lose value?

Again, a stock loses value when demand for that stock decreases. Contributing factors may include:

• Slow growth in a company's turnover – or a loss of turnover.
• The widespread belief that a company's stock is overvalued, especially if it is a speculative growth company (e.g., the dotcom bubble).
• Negative investor sentiment following shaky leadership, legal issues or a management scandal.

Who buys stocks that go to zero?

When a stock reaches zero or falls to a level that disqualifies it from listing on a major exchange, the shares move to over-the-counter markets. This name is derived from the fact that transactions in these markets take place directly between two parties – without a central exchange. Examples of this are the marketplaces OTCQX, OTCQB and OTC Pink. There are often few buyers in OTC markets, and prices can fluctuate wildly in just a few transactions.

These volatile markets remain popular with speculators hoping to make quick profits on companies that others have left for dead (known in the industry as 'penny stocks'). Penny stocks are shares of companies that trade for less than $5. They are often very illiquid, meaning they trade infrequently. As volume decreases, fewer traders are willing to take a chance on companies trading for a few dollars, and these stocks can often drop to zero due to a lack of interest.

Examples of stocks that went to zero

Enron

Enron, a major energy company that reached its peak in the 1990s, hid huge losses and toxic, worthless assets behind creative accounting practices. Enron shares traded as high as $90.75 in 2000. When the company started reporting huge losses, analysts and investors became suspicious of the accounting practices it used to value its assets and dumped the stock. Enron was trading at $0.26 just before it filed for bankruptcy in December 2001.

WorldCom

This telecommunications company committed the largest case of accounting fraud in American history. WorldCom has inflated its net income and cash flow by booking expenses as investments to hide its losses. In 2001, it reported a profit of $1.3 billion, even though it was losing money. The stock price fell from more than $60 to less than $1 before the company filed for bankruptcy in 2002.

How does a company become worthless?

When a company can no longer operate profitably, it may be forced into bankruptcy. At this point the company is essentially worthless until it decides to restructure or close down completely. Companies in this precarious situation have two choices:

• Chapter 11 bankruptcy, also known as a reorganization.

  Companies choose this route when working with creditors to renegotiate their debts in hopes of returning to profitability. Unfortunately, shareholders often see very little return in this scenario. In fact, a bankrupt company will often retire its shares, leaving investors' shares worthless.

• Chapter 7 or liquidation.

  If a company finds itself in a situation too serious for restructuring, it is forced to sell its assets to repay creditors such as banks, bondholders and in some cases even preferred shareholders. In most cases, holders of common shares receive nothing.

Prevents a stock price from going to zero

When a company's stock price starts to decline, it can take steps to avoid being relegated to the OTC market. If their shares are eventually relegated to the OTC market, it is likely that the volume of their shares will dry up and they will suffer further losses. Some steps they can take to prevent this are:

• Reverse split.

  A company canreverse stock splitto reduce their number of shares outstanding and increase the price per As a result, shareholders lose a certain number of shares, but the value of each share increases, causing the company's stock price to rise. For example, in a 1:2 reverse stock split, a shareholder with 100 shares of common stock would receive 50 shares, but the value of each share would double.

• Buy back shares.

  If company executives believe a stock is dramatically undervalued for no reason, they can buy back some of the shares at the discounted price and then reissue them when the price returns. Buybacks are becoming increasingly popular in the stock markets. Investors should be on the lookout for companies with buyback plans as it is possible that demand could boost share prices.

• Improve financial results.

  If a company increases sales and earnings without increasing costs, it will increase its return on investment (ROI), making the stock more attractive to investors. Companies with falling stock prices will often bring in experts who they pay in shares, giving these professionals enormous incentives to get their operations in order. For example, Peloton brought in Barry McCarthy, the former CFO of Spotify and Netflix, to stem losses and streamline operations in early 2022.

What does it mean to you

The possibility of your stocks falling to zero shouldn't deter you from investing, but it does remind you of the inherent risks associated with the stock market. If you're concerned about your ability to monitor your investments but still want to limit risk, you canwork with investment professionals at Titanto actively manage your capital. Our team will help you make stock choices that match your risk tolerance and aim to consistently outperform the market.Start today.

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