August 30, 2011 | In: Trivia

What Happens When a Stock Hits Zero?

Now that AIB is shown as having a zero dollar value on Google Finance, I thought that an appropriate question for many investors would be, “what will happen when a stock hits a zero”?

Let me answer this question…

When a company issues shares to be traded in the public market, its ultimate aim is to raise cheap money (to expand the business, for example). In this case, cheap money means money at no interest whatsoever. For example, let’s say a company wants $10 million dollars to build a plant. The company decides to go public, so it creates a million shares, each trading at an initial value of $10. Assuming the company sells all million shares in the market, the company will raise $10 million dollars (of course there are listing fees and other fees to be taken into consideration, but for the sake of simplicity, we are going to ignore them). Now the company has borrowed $10 million dollars from investors at 0 percent interest. The investors fund the company because either they think it will pay them dividends, or they think that the stock price will go up. In any case, the company now has the money.

Now the performance of the company directs the price of the stock in the market, if the company is performing well then the stock goes up, if the company is performing poorly, then the stock price will go down. If the company goes bankrupt (files for Chapter 11), then the stock price will drop to zero or, at best, to a few cents. In this situation, the NYSE/NASDAQ will halt its trading and all the investors will lose their money (of course, investors can sue the company, but that usually doesn’t lead to anything). So, when a stock hits zero, it means that the company is bankrupt, and has lost all the money that its investors put it.

Now you may ask this question “Isn’t this a scam?” Well, think about it this way, let’s say you gave $1,000 to a friend of yours because he needed the money to do a business. 2 days later, your friend died, and unfortunately, your friend has no kins whatsoever – no kids, wife, etc… This is the same situation, you gave some of your money to a company (instead of a friend), the company died, and now you lost all your money. Now as for the “scam” part, there are quite a few companies that go public (I can think of some) for the sole reason to steal money from the investors by convincing them that the company has actually a feasible business plan that will generate a lot of money to its investors. If you can prove that a company did this to you, then you can sue its board (who probably made a lot of money out of this scam) and win.

In a nutshell (and to conclude), here’s what will happen when a stock hits zero:

- The stock is booted from all markets, including secondary and OTC markets.
- All the investors lose their money.
- The company files for Chapter 11.

Comment Form