Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)

Can a stock lose its value?

The answer to this question, in theory at least, is a pretty straightforward: Yes.

Stocks are able to lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, in reality shareholders often do receive some residual payment back, but this is usually just pennies on the dollar. This fact should not scare you off from investing in stocks, or investing in general. However, we would be lying if we claimed that stocks carry no risk (although some, of course, carry more than others). Read on to see how a stock's price can get wrecked and approach zero.

Key Takeaways

  • Supply and demand determine the value of a stock in the market, with higher demand driving the price higher in turn.
  • Lower demand causes a stock to lose some value—and plummeting demand could cause it to lose all value.
  • Since a stock's price is meant to reflect its future profitability and growth, companies that go bankrupt can become effectively worthless.
  • This is often a calamity to those who are holding long positions and hoping a stock price will rise.
  • A massive drop in stock value can, however, be a boon to investors who are short the stock.

Determining Stock Price and Bankruptcy

To help you understand why a stock can lose all its value, we should review how the stock price is determined. Specifically, the value of a stock is determined by the basic relationship between supply and demand. If a lot of people want a stock (demand is high), then the price will rise. If a lot of people don't want a stock (demand is low), then the price will fall.

If a stock's demand sinks dramatically, it will lose much (if not all) of its value. The main factor determining the demand for a stock is the quality of the company itself. If the company is fundamentally strong, that is, if it is generating positive income, its stock is less likely to lose value.

So, although stocks carry some risk, it would not be accurate to say that a loss in a stock's value is completely arbitrary. There are other factors that drive supply and demand for companies. These have a lot to do with a company's fundamentals and growth outlook. As long as these are favorable and positive, a stock's price tends to rise. If, however, a company can no longer operate profitably, there is a chance that it will be forced out of business and declare bankruptcy.

When a company declares bankruptcy, it doesn't automatically mean that is absolutely worthless. The company can still hold assets that could be sold, brand recognition, and skilled employees. As a result, companies will often negotiate with their creditors to renegotiate their debts and restructure the company to emerge from bankruptcy. If the company is unable to achieve this, it may be forced to sell off its assets in a fire sale to repay creditors (such as banks, bondholders, and preferred stockholders). Only once these parties have been repaid can common stockholders receive any compensation based on what's left. If there is nothing left, the stock is worth zero.

Companies that are fundamentally strong are less likely to completely lose value than those that are on shakier legs, to begin with.

Impact on Long and Short Positions

The effects of a stock losing all its value will be different for a long position than for a short position. Someone holding a long position (owns the stock) is, of course, hoping the investment will appreciate. A drop in price to zero means the investor loses his or her entire investment: a return of -100%.

Conversely, a complete loss in a stock's value is the best possible scenario for an investor holding a short position in the stock. Because the stock is worthless, the investor holding a short position does not have to buy back the shares and return them to the lender (usually a broker), which means the short position gains a 100% return. Bear in mind thatif you are uncertain about whether a stock can lose all its value, it is probably not advisable to engage in the advanced practice of short selling securities. Short selling is a speculative strategy andthe downside risk of a short position is much greater than that of a long position.

To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

Even if a company goes bankrupt, common shareholders will often receive some sort of residual compensation, but only cents on the dollar. If a company files Chapter 11 bankruptcy, for example, a judge may restructure the firm, allowing it to continue operations after repaying creditors. If the company declares Chapter 7, the company is dead, and so are your shares.

Real-World Example of a Stock Losing All Its Value

Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s. By the early 2000s, the company was riding high and its stock was seeing all-time highs.

What people didn't know yet, however, was that Enron was using accounting tricks to hide massive losses and holdings of toxic assets. By 2001, analysts and investors began to question Enron's mark-to-market accounting practices and became suspicious of the company's earnings. In 2001, the company started to report massive quarterly losses, which quickly spiraled out of control.

At Enron’s peak, its shares were worth $90.75 in 2000; just prior to declaring bankruptcy on Dec. 2, 2001, they were trading at just $0.26.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (1)

Can a Stock Go Negative?

Technically, a company that has more debts and other liabilities than assets is worth a negative amount. Shares of its stock, however, would only fall to zero and would not turn negative.

What Happens If a Stock Price Goes to Zero?

If a stock's price falls all the way to zero, shareholders end up with worthless holdings. Once a stock falls below a certain threshold, stock exchanges will delist those shares. They may continue to tradeover-the-counter (OTC), and even bankrupt companies may see their shares trade for above zero for some time as speculators make wild bets on a miracle recovery.

Can You Lose All Your Money in Stocks?

Technically, yes. You can lose all your money in stocks or any other investment that has some degree of risk. However, this is rare. Even if you only hold one stock that does very poorly, you'll usually retain some residual value. The best way to ensure that you don't experience massive losses in stocks is to be well-diversified, research the holdings you invest in, and set thresholds to the downside whereby you will cut your losses and exit positions.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)

FAQs

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? ›

A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

Can a stock lose all its value? ›

It's also true that some stocks will fall precipitously and lose all their value. That said, whether or not an investor experiences financial loss or gain in the case of a stock reaching zero depends on whether an investor is in a long- or short-term position.

How do short positions affect stock prices? ›

Short selling, an oft-misunderstood practice, often plays a vital role in market strengthening. Unlike the traditional investing strategy of buying low and selling high, short selling allows investors to sell securities they do not own, with the intention of buying them back later at a lower price.

How does shorting a stock lose money? ›

Losses for short-sellers can be particularly heavy during a short-squeeze, which is when a heavily shorted stock unexpectedly rises in value, triggering a cascade of further price increases as more and more short-sellers are forced to buy the stock to close out their positions.

What happens if you short a stock and it goes down? ›

If the stock price falls, you'll close the short position by buying the amount of borrowed shares at the lower price, then return them to the brokerage. Keep in mind that to earn a profit, you'll need to consider the amount you'll pay in interest, commission and fees.

How does the stock market lose value? ›

By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Can a person lose all their money in the stock market? ›

A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

What is a long position in the stock market? ›

Having a “long” position in a security means that you own the security. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own.

How long can you hold a short position? ›

There is no set time that an investor can hold a short position.

What is a short position in stocks? ›

Taking a short position, also known as short-selling, is an investment technique in which you essentially do the opposite of what you'd do with a typical investment. Instead of buying the stock at a low price and hoping to sell it at a higher price, you sell it at a high price and hope to buy it later at a lower price.

What happens if I 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!

Who loses in a short position? ›

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.

Is it illegal to borrow money to invest? ›

Personal loans are generally free of spending restrictions, so you can potentially use the funds to invest. However, some lenders disallow the use of loan proceeds to make certain investments.

Can I sell short if I own the stock? ›

Short sale against the box, or simply short against the box, is the act of selling short securities that you already own.

Can an average person short a stock? ›

Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.

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.

Can a stock price go 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.

Do you lose all your money if the stock market crashes? ›

Your portfolio might lose value, but losing value is different than losing money. When stock prices fall, your investments are not worth as much. But the market will inevitably rebound, and when that happens, stock prices will increase once again -- and your portfolio will regain the value it lost.

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