August 29, 2011 | In: General

What Happens When a Stock Gets Delisted?

After my post on AIB delisting itself from the NYSE yesterday, I was wondering what will happen to the investor’s shares when a stock gets delisted from either the NYSE or the NASDAQ, so I just did research on this topic and I will now share my results with you!

Essentially a company is delisted (or delists itself) from the stock market for the following reasons:

  1. The company can no longer maintain the listing requirements. This typically means that the stock has dropped below the $1 level for an extended period of time.
  2. The SEC (the US market regulator) has determined that the company is deceiving investors. For example, the financial reports that the company is submitting are fake and/or misleading.
  3. The company willingly elects to get out of the stock market. This is the case of AIB last week. Usually this means that the company feels that it can no longer maintain its listing requirements on the long term.
  4. The company is filing for Chapter 11 (e.g. the company is going bankrupt).
  5. The company is receiving a buyout from another company.

The last case is the best case scenario for the shareholders, because when a company receives a buyout, its stock spikes on the last few days of trading, and investors can sell their shares at a very high price. Those who do not sell will be offered one of the following (they will be notified by mail on what will happen to their shares):

  • Shares in the new company. The amount of the shares will be equivalent to the total amount of their shares based on the buyout plan (for example, if the company decides to buy another company for $10 a share, and an investor owns a thousand shares in the latter company, then he will be offered $10,000 worth of shares in the former company)
  • Cash equivalent to the number of shares multiplied by the price per share offered by the buying company
  • A mix of shares and cash equivalent to the number of shares multiplied by the price per share offered by the buying company
  • Investors are always ecstatic when their company gets bought by another company…

    Now as for the first 3 cases, here’s what will happen:

    • The shares will still exist, however, they will no longer exist on the NYSE or the NASDAQ. They will be trading automatically on the OTC Markets, which means that the stock will be officially labeled as a penny stock.
    • The stock symbol will change. You will be notified by the company of the new stock symbol.
    • The stock will be priced at the same closing price of the last trading day on the NYSE or the NASDAQ. However, the stock price will instantly collapse because all the investors will start jumping ship. OTC markets are bad news.
    • My broker doesn’t provide me with the functionality to trade stocks on the OTC markets, and I suspect this is the same for most brokers. This means that if you want to get out of this stock it’s not as easy as entering the number of shares, entering the stock symbol, selecting “sell” as type of transaction, and clicking on submit. It will most likely be a logistical nightmare to get out of these shares.

    As for the 4th case, when a company files for bankruptcy (chapter 11), then the stock will be worthless and you will lose all your investment. The only thing that you can do at that moment is suing the company.

    Some tips:

    • It is always wise to avoid stocks hovering around the $1 level, and you should immediately sell your shares when the stock drops below $1, even for a minute. The stock can lose 20% of its value the second it starts trading on the OTC markets.
    • Avoid stocks that are consistently plagued with bad news/rumors.
    • Avoid investing in a company that has no future.
    • Avoid stocks with very high short ratio.

    This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

1 Response to What Happens When a Stock Gets Delisted?

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What Happens to a Stock When Its Company Goes Private? « Fadi El-Eter

September 7th, 2011 at 10:53 am

[...] – After a few days, the stock will no longer trade on the public market (meaning that the company will delist itself). – Once the stock is delisted, shareholders are no longer allowed to sell their shares through [...]

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