What Happens to Stocks That Fall to Zero?
Stocks that fall to a selling price of zero dollars are probably disasters for investors and companies alike. These securities will immediately – or quickly – be delisted by their stock exchange and can quickly become worthless to investors. The reasons for this precipitous "fall from grace" can be many. The result, unfortunately, is most often the same – worthless stocks. Common reasons include operating problems, product availability, delivery or quality issues and, of course, mismanagement.
When a stock's value falls to zero, many of the major exchanges will delist the particular security in question.
Stock Exchange Listings
All stock exchanges have rules for stock registration and listing. Stocks that fall below minimum selling selling prices – for example there's a $4 minimum on the New York Stock Exchange – will be delisted. Investors can no longer buy or sell securities through normal channels when the stock disappears from its exchange listing. Securities with a zero value will always be delisted from major stock exchanges. The New York Stock Exchange, the Nasdaq Exchange and other global exchanges have listing standards that, if not met, result in delisting the stock. Zero value is always a common cause of delisting.
Owning a stock whose price drops to zero is devastating to investors and the issuing company. If you're an investor in a public company whose stock price crashes to zero dollars, either make wall space for displaying worthless stock certificates or investigate the company further. There could be a unique, freakish event that caused the price decrease. More likely there are intrinsic operating or financial difficulties that leave little room for recovery.
Defining the Pink Sheets
When stocks reach zero – or even close to it – they become over-the-counter securities, appearing on so-called pink sheets. The OTC market tends to be extremely volatile and a haven for speculators hoping to make fast profits. While it seldom happens, OTC stocks can be popular, even after losing their stock exchange listing privileges. The company could still be experiencing growth, and could be relisted on a major exchange in the future. Be aware, however, of the reasons for a stock's listing on pink sheets versus trading availability on a formal stock exchange.
Even a company that files a Chapter 11 bankruptcy, hoping to reorganize its finances, instead of a Chapter 7 liquidation bankruptcy, typically must cancel and eliminate its original stock, making these shares worthless. Should the company successfully reorganize and become financially sound, it will usually issue new stock, leaving former shareholders with worthless stock certificates.
A recent example of this involves Appvion, whose Employee Stock Ownership Plan may be worthless after the company filled Chapter 11. If former shareholders believe the company will now succeed, they must buy some of the new post-bankruptcy stock should they want to continue their investment.
Zero Stock Bids
When your stock initially is delisted and falls to zero, sometimes you can still get bids through the over-the-counter market. There are times that speculators, because of rumors or belief that a company will recover and have value, will make a bid to purchase your stock. If you don't share the belief that the company will make a comeback, consider taking the offer, however low it may be. Remember, the next step for most zero stocks is worthlessness.