What Happens If a Stock Goes to Zero? | Titan (2024)

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What happens if a stock goes to zero?

What this means for investors

What determines a stock’s price?

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?

Preventing a share price from going to zero

What this means for you

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Stock Trading

What Happens If a Stock Goes to Zero?

Jan 31, 2024

·

8 min read

A stock can plummet to zero — but what are the implications of a stock that is worth nothing?

What Happens If a Stock Goes to Zero? | Titan (1)

Every financial advisor or professional investor will tell you the same thing: all investing comes with inherent risk. And when you’re buying individual stock — rather than investing in index funds or ETFs, for example — it’s more likely that one of your investments will end up losing you money. So what happens when a stock doesn’t just lose you money, but goes to zero and wipes out completely?

What happens if a stock goes 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.

A delisted stock loses the privilege of appearing on popular stock exchanges and because of this, no buying or selling of this stock can occur through typical methods. Instead, the stock is considered over-the-counter (OTC) and appears on a separate OTC bulletin board. This bulletin board is known as the “pink sheets” by speculators who want to engage in bargain trading on alternative exchanges.

If a stock can fall to zero, can it fall below zero? In other words, can you lose more than you initially invested in a stock? As long as you’re not borrowing money on margin from your broker to make your stock purchases, the answer to both of these questions is no.

What this means for investors

The volatility of the stock market is unavoidable. If you’re choosing to invest in it, you have to be prepared to accept a certain level of risk. 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.

The average investor (i.e., the long-term investor) is usually devastated to watch their stock plummet, but a stock plummeting might be good for a short-term investor. This is because they try to sell stocks “short.”

In a short sale, an investor borrows shares in a company and sells them, predicting that the stock will fall in value so that they can then buy the stock at a lower price, return the loan, and keep the difference for themselves as profit.

Shorting stocks is very risky. If we take a $10 stock, for example, the maximum an investor can lose if that stock falls is $10. But if you’re “short” and the stock goes to $100, you lose $90. The hedge fund Melvin Capital closed in 2022 after shorting its shares of AMC Entertainment and other “meme” stocks, only to see these stocks skyrocket in price, ultimately leading to billions in losses.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

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What determines a stock’s price?

Supply and demand economics are the main driver in what makes stock prices go up and down. If demand is high, for example, people buy stocks, causing the price of that stock to rise. If demand is low for a certain stock, investors might choose to sell, causing prices to fall — and sometimes with dramatic speed.

Companies sustain demand for their shares by running dependably profitable businesses. But this is difficult to do, especially in a poor economy. Most startups fail and no company — no matter how established — will report increased earnings for every quarter of their existence.

What can cause a stock to lose value?

Again, a stock loses value if demand for that stock decreases. Contributing factors might include:

  • Slowed growth in a company’s revenue — or a loss in revenue.
  • Widespread perception that a company’s shares are overvalued, especially if a speculative growth company is involved (e.g., the dot-com bubble).
  • Negative investor sentiment following a shakeup in leadership, legal issues, or a management scandal.

Who buys stocks that go to zero?

When a stock reaches zero or dips to a level that disqualifies it from being listed on a major exchange, its shares move to over-the-counter markets. This name is derived from the fact that trades on these markets are made between two parties directly — without a central exchange. Examples include the OTCQX, OTCQB, and OTC Pink marketplaces. Buyers are often scarce in OTC markets and prices can swing wildly on just a few trades.

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 in companies that trade for less than $5. They are often very illiquid, meaning they don’t trade often. As volume declines, fewer traders are willing to take a chance on companies trading for a few dollars and these stocks can often fall to zero due to lack of interest.

Examples of stocks that went to zero

Enron

A large energy company that peaked in the 1990s, Enron hid huge losses and toxic assets of no value behind creative accounting practices. Enron stock was trading as high as $90.75 in 2000. When the company began reporting massive 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 declared bankruptcy in December 2001.

WorldCom

This telecommunications company perpetrated the largest case of accounting fraud in U.S. history. WorldCom inflated its net income and cash flow by recording expenses as investments to conceal its losses. In 2001, it reported $1.3 billion in profits even though it was losing money. Its stock price fell from over $60 to less than $1 before the company declared bankruptcy in 2002.

How does a company become worthless?

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

  • Chapter 11 bankruptcy, also known as a reorganization.

    Companies choose this route when they work with creditors to renegotiate their debts in hopes of returning to profitability. Unfortunately, stockholders often see very little return in this scenario. In fact, much of the time, a bankrupt company will cancel its stock, making investor shares worthless.

  • Chapter 7 or liquidation.

    If a company finds itself in a situation that is too dire for restructuring, it is forced to sell off its assets in order to repay creditors such as banks, bondholders, and in some cases, even preferred stockholders. In most cases, holders of common stock get nothing.

Preventing a share price from going to zero

When a company’s share price starts to decline, they can take steps to avoid being relegated to the OTC market. If their stock does end up relegated to the OTC market, it’s likely the volume of their stock will dry up and they’ll suffer further losses. Some steps they might take to avoid this include:

  • Reverse splits.

    A company may initiate a reverse stock split to decrease their number of outstanding shares and increase the price per share. As a result, shareholders lose a certain number of shares, but the value of each share goes up, raising the stock price for the company. For example, in a 1:2 reverse stock split, a shareholder with 100 common shares would end up having 50, but each share's value would double.

  • Share buybacks.

    If company managers believe a stock is dramatically undervalued for no reason, they might repurchase some of the shares at the reduced price and then reissue them once the price has rebounded. Buybacks are increasingly popular in equity markets. Investors should be on the lookout for companies with buyback plans in place because it’s possible that demand can lift share prices.

  • Improve financial performance.

    If a company increases sales and revenue without increasing costs, it will increase its return on investment (ROI), making its stock more attractive to investors. Companies with slumping share prices will often bring in turnaround experts that they pay in the form of equity, providing these professionals with huge incentives to fix operations. Peloton, for example, brought in Barry McCarthy, the former chief financial officer at Spotify and Netflix, to stem losses and streamline operations in early 2022.

What this means for you

The possibility of your stock plummeting to zero shouldn’t scare you from investing, but it is a reminder of the inherent risks associated with the stock market. If you’re concerned over your ability to keep close tabs on your investments but still want to reduce risk, you can work with investment pros at Titan to actively manage your capital. Our team will help you make stock choices that are consistent with your risk tolerance and that aim to consistently outperform the market. Get started today.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisem*nts; Titan has not reviewed such advertisem*nts and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circ*mstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

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What Happens If a Stock Goes to Zero? | Titan (2024)

FAQs

What Happens If a Stock Goes to Zero? | Titan? ›

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.

Do you owe money if your stock goes to zero? ›

The answer is no. While a stock's value can fall to zero, it cannot go negative. You will never owe money on a stock that drops to zero, though, sadly, you can lose more money than you initially invested.

Can a stock come back from zero? ›

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.

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 shares drop 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 I owe money if stock goes negative? ›

If a stock goes negative, do you owe money? If you do not use borrowed money, you will never owe money with your stock investments. Stocks can only drop to $0.00 per share, meaning you can lose 100% of your investment but not more than that, seeing as the stock cannot be of negative value.

Do you owe money if your stock goes under? ›

Generally, no. You don't owe money just because a stock goes down.

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.

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.

How to get money from delisted shares? ›

Delisted shares cannot be traded on the stock exchange, to sell these shares one needs to trade them in the over-the-counter market. With Sharescart, you can sell or liquidate your shares anytime you please. There are a lot of investors in Sharescart that want to invest in various companies.

How do you dispose of delisted stocks? ›

If the security cannot be sold in the market, it may be possible to dispose of the worthless security by gifting it to another person who can be related or unrelated to you. If you gift the worthless security to a family member, you will need to ensure that the person is not your spouse or minor child.

What happens to investors money when a stock is delisted? ›

When a company delists, investors still own their shares. However, they'll no longer be able to sell them on the exchange. Instead, they'll have to do so over the ounter (OTC).

Who keeps the money you lose in the stock market? ›

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.

What's the most a stock has gone up in one day? ›

March 24, 2020 saw the largest one-day gain in the history of the Dow Jones Industrial Average (DJIA), with the index increasing 2,112.98 points.

What are the odds of losing money in the stock market? ›

That's a roughly 1-in-4 chance of losing money in stocks in any given year. In 19 of those years, the loss was more than 5%. On the plus side, there are a lot of winning streaks. There would have to be for investors to enjoy an annualized return of 10% over the long-term.

What happens if my stock goes negative? ›

The value of the stock itself can't go negative. It can only become zero is the company goes bankrupt. The only case when you can see negative result is if you bought the stock and the price declined. For example, you bought Walmart stock at $157 and it fell to $150.

What happens if the S&P 500 goes to zero? ›

A stock price of zero, however, means that the expectation of future earnings is irrevocably lost, as would be the case for a company that dissolves and ceases to do business. In order for an entire stock market to go to zero, the same would need to be true for all companies in the stock market.

What happens if your brokerage account goes negative? ›

If your equity falls below the minimum because of market fluctuations, your brokerage firm will issue a margin call (also known as a maintenance call), and you will be required to immediately deposit more cash or marginable securities in your account to bring your equity back up to the required level.

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