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 stock goes to zero? ›

Stock prices can fall all the way down to zero. That means the stock loses all of its value and a shareholder's earnings are typically worthless. In this case, the investor loses what they invested in the stock.

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

For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back.

What stocks went to zero? ›

Some well-known examples exist in recent public memory, such as Lehman Brothers, Blockbuster, and Enron. All of these were public companies that "went to zero” for different reasons. If the entirety of your investment was in one of these companies, then your investment went to zero.

What happens when a stock closes? ›

If you bought stock before the company suspends trading, the idea's the same. The contract still holds and you'll still get your shares. Your money has been paid, you'll receive the stock (but won't be able to sell it) and you'll get any value that comes to shareholders out of the administration process.

Can you claim a loss if stock goes to zero? ›

How do I report my loss? If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon.

What happens when a stock becomes worthless? ›

Worthless securities have a market value of zero and, along with any securities that an investor has abandoned, result in a capital loss for the owner. They can be claimed as such when filing taxes.

What happens to put options if 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.

Who loses money when you short a stock? ›

For those who don't know, short selling is a way to make money when stock prices fall. The investor borrows a stock, sells it, and then covers their short by buying the stock. If the stock price went down, the investor makes the difference. However, if the stock price rises, the investor's short loses that much money.

What stock never falls? ›

Despite what you might read on social media, stocks that never go down don't exist. If you want a completely safe investment with no chance you'll lose money, Treasury securities or certificates of deposit (CDs) may be your best bet.

What does zero stock mean? ›

In short, No inventory or Zero stock is also known as zero inventory. This technique is mostly used by manufacturers to improve supply chain efficiency by minimizing inventory as much as possible, and by connecting inventory purchases to consumer orders and shipping requests.

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 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 if you short a stock that goes out of business? ›

What happens when an investor maintains a short position in a company that gets delisted and declares bankruptcy? The answer is simple: The investor never has to pay back anyone because the shares are worthless.

What happens to shares if a company shuts down? ›

When a company files for bankruptcy, the value of its stock often declines significantly or becomes worthless, depending on the specifics of the bankruptcy proceedings. At that point, the shares are de-listed from exchanges and any dividends halted, but the residual shares may continue to trade over-the-counter (OTC).

What happens to a put option if stock goes to zero? ›

If the stock falls to zero, the put writer is obligated to buy a worthless stock at the strike price. Still, this short-term view gives an incomplete picture of the risks and rewards.

Does a company lose money when its stock goes down? ›

No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.

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.


Top Articles
Latest Posts
Article information

Author: Tish Haag

Last Updated:

Views: 5479

Rating: 4.7 / 5 (47 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Tish Haag

Birthday: 1999-11-18

Address: 30256 Tara Expressway, Kutchburgh, VT 92892-0078

Phone: +4215847628708

Job: Internal Consulting Engineer

Hobby: Roller skating, Roller skating, Kayaking, Flying, Graffiti, Ghost hunting, scrapbook

Introduction: My name is Tish Haag, I am a excited, delightful, curious, beautiful, agreeable, enchanting, fancy person who loves writing and wants to share my knowledge and understanding with you.