What happens when stocks go to $0? This is what happens if you hold those stocks and which investors get their money first
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As an investor, one of my biggest fears, is seeing my stocks worth less money than what I started with. I want my money to grow over time and pay me dividends for the rest of my life. But what if these stocks go to zero and become worth zero $0?
If you’ve ever lost money in the stock market, don't worry - BILLIONAIRE investor Carl Icahn just sold his Hertz stock for 72 cents a share, giving him a whopping 40 million dollars, which sounds like a lot of money, until you realize that sale cost him $1.8 BILLION DOLLARS of his original investment.
Most people think that a company who’s stock reaches $0, means that it now goes bankrupt. But it’s actually not quite how it works. Stock price follows reality, and it’s stock price that follows bankruptcy. A company must first lose all of it’s money and then it goes out of business, and then the share price drops to $0 - which actually never happens.
In order for a stock to reach $0, somebody would have to sell their stock for $0, and that would make no sense, you’d just keep it. Otherwise we’d see $0 stocks inside our brokerages. Instead, the stock price just keeps going lower until there are no more people left to buy it.
For the NYSE, the New York stock exchange, it has a minimum price per share of $1, anything below that means it gets delisted if it holds that value for a long period of time. The NASDAQ, which is another marketplace for stocks has a minimum trading price of $4. But in order to understand exactly how the price of a stock actually works, there’s two major components to it.
#1 Intrinsic Value - or real value of a stock which is determined by adding up all the assets that a company owns, minus the liabilities / debts that it has. As long as the result, or the difference between these two is positive, then the company is considered “solvent”. This is not the price we see reflected in our brokerages.
#2 The market price. Which is driven by supply and demand, news, and sentiment of things we see and hear. This is not the most accurate way to judge a stock price, but that's what brokerages like Robinhood will show us.
But what if you hold those stocks even if they are worthless, because maybe someday, they’ll be worth something again. First, cut your losses and move on. Once the price drops low enough, the stock is delisted, and you no longer own anything of value. Except in some instances where a stock is still trades for fractions of a penny another marketplace in which case you still have some shares but for all intents and purposes, they are worthless.
Once a company has declared bankruptcy (either Chapter 7, which is total liquidation), or Chapter 11 (which is a restructuring of the corporation), it will issue NEW shares that are indepedent of the old ones that you still have. Investors will buy the new shares, driving your old shares lower in value until they potentially get delisted. Here's a list of priorities that a "stock" must pay in order of most to least important.
1. The most important people are the “SECURED” creditors, these are people that loan companies their money which is backed by collateral or property.
2. Once the secured creditors have been paid, the next people in line are the unsecured creditors, which are usually credit card companies that loan their money that is NOT backed by any collateral or property. They make more interest, but they also take more risk.
3. Bondholders. These people hold a promise from the company that the company will pay back all owed debts to bondholders. These people have priority over shareholders as well.
4. Preferred shareholders.
5. Common shareholders - this is you and I. We are always the last in line to get our money when a company goes bankrupt which is why, the common investor almost always gets nothing. This is what's happening to the Hertz stock right now, and I would be very careful investing in companies like that.
Use common sense, and look at a company's quarterly earnings report, as well as any outstanding debt they may have to get a better understanding where the stock is headed.
I'm not a licensed professional, this is not investing advice.
*Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
