August 12, 2011 | In: General

Can Stocks Go Negative?

I had a small discussion with my grandfather the other day. He noticed that I don’t seem to work in a company, and yet I have money. So one day he asked me “What do you do in life to make money?”. I have answered, “Several things”. “Like what?”, he asked. “I trade stocks and I have some online ventures”, I answered. He then asked another “Stock trading? Tell me one thing, can your stocks go negative?” I first didn’t understand the question, I thought that he wanted to know if my stocks go down in value (which is very normal), but what he really meant was if a stock can trade with a negative value, for example, BAC trading at $-2 (which, by the way, may happen soon if the stock keeps on losing a dollar or two every week. OK, it can’t happen, but you get the point).

In any case, I told my grandfather that no, there’s no way on heaven or on earth that a stock can trade with a negative value. You can’t lose money more than your original investment, except in the case when you are shorting stocks (which is something that many investors don’t know how to do/refuse to do). I then told the following scenario to my grandfather:

– Let’s say you have $10,000, and there is a stock that you want to buy which is trading at $10.
– With your $10,000 you buy 1,000 shares of that stock.
– If the stock drops to $5, then you will lose $5,000 of your investment.
– If the company goes bankrupt, then you will lose all your investment (your $10,000 will be lost, all of them), but there is no way that you will lose more than $10,000, because the absolute minimum that a stock will drop to is $0 (or maybe 1 cent – I’m not sure).

After explaining the above to my grandfather, I then started pondering the thought that he had, and I realized it’s one of the main reasons that people mistakenly think that stock trading is equivalent to gambling. It’s a shame. I think stock trading is the best, the funnest, and a very ethical way to make money.

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