As the stock market struggles to maintain its decade-long gains in 2020, many budding investors are unsure of what happens when a stock hits zero.
The stock market entered 2020 off the back of the longest bull run in history, lasting nearly 11 years. In that time, many new investors will have begun their careers and have never known the bear market. To take a phrase from AT&T's (NYSE: T) HBO series 'Game of Thrones', these 'sweet Summer children' never stood a chance in 2020.
With the coronavirus epidemic sweeping the globe in early 2020, the stock market reacted in a bad way, with several of the defining stocks of the past decade such as Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) suddenly falling fast.
The drop is far from the same levels as the 2008 financial crisis and these companies' stock prices are not going close to zero any time soon, but what about smaller-cap investments? Can they hit zero?
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Can a company's stock hit zero?
The simple answer to this question is yes: a company's stock value can hit zero. However, it can be a bit more complicated than a company simply being worth nothing. Even companies with very volatile, low stock prices such as NIO (NYSE: NIO) and Nautilus (NYSE: NLS) are unlikely to fall to zero as they are still making enough money that investors are still buying shares.
A recent case of a stock almost hitting zero is MoviePass parent company Helios and Matheson Analytics, which filed for Chapter 7 bankruptcy in January 2020. The company was forced to cease operations of its important MoviePass business last September, while all of its board members also resigned in January. The company had been undercharging customers' subscription costs for years, resulting in multi-million dollar deficits monthly. It was also heavily crushed by cinema chain AMC Entertainment (NYSE: AMC), which launched its own rival to MoviePass in 2018.
At one point the firm was burning through $20 million per month, leading to an 'at-the-market' sales of $300 million worth in shares, in conjunction with the SEC. The problem became clear though: nobody was willing to buy them. By the end of January 2020, its stock had officially fallen to zero.
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What happens to a company when it hits zero?
As with the case of Helios, a company whose stocks bottoms out can file for either Chapter 7 or Chapter 11 bankruptcy.
The chief difference between the two is that, under a Chapter 7 bankruptcy filing, the debtor's assets are sold off piece by piece in order to repay creditors and loan-lenders. With Chapter 11, the bankrupt company can negotiate with creditors to alter the terms of the loan without having to liquidate its assets. Another key difference is that with Chapter 11, the company's shares can still be traded, while with Chapter 7, all business activities, including trading, cease.
How does a company become 'worthless'?
It is important to note that in the majority of cases where a company has lost almost the entirety of its value, it has filed for bankruptcy before actually hitting zero. Only when the stock is actually worth $0.00 is it truly 'worthless'.
That being said, some companies are much likelier to hit this mark than others. When a company's fundamentals are inherently bad, it is going to perform worse than a firm with strong fundamentals such as good leadership, strong revenue, and growth potential. It also takes a lot of work to become a publicly-traded company, and in general, the company has to be strong to do so, making it less likely that it will fall to nothing.
Companies will also be delisted from stock exchanges if their stock price falls below a certain threshold, set by the exchange itself. For example, The NYSE will remove stocks if the share price remains below a dollar for 30 consecutive days.
Even the worst-performing stocks in the MyWallSt family, Under Armour (NYSE: UAA) and GoPro (NASDAQ: GPRO), which have fallen close to 90% each in the past 5 years, are very unlikely to hit zero. In some cases they would be bought out long before that became a reality, which is exactly what happened in Fitbit's (NYSE: FIT) case, as it was purchased by Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) in November 2020.
Look on the bright side
The important thing about investing is to know that it requires patience, and even if not all your stocks are winners, those good stocks should outweigh the bad ones in the long run. If you invest smart and diversify your portfolio with the intention of buying and holding, you should see solid returns, which is why we beat the S&P 500 (NYSEARCA: VOO).
If you're getting started in your investment journey, always remember MyWallSt's six golden rules:
1. Get started: No matter how big or small the investment.
2. Think long-term: The buy and hold philosophy will outperform the market in the long-term.
3. Never borrow to buy: Save first, then invest.
4. Diversify: Accumulate a minimum of 12 stocks across 6 different sectors.
5. Buy what you believe: Own part of a business you love.
6. Invest What You Can, When You Can: Get your saving habits right.
Combine this with our list of market-beating stocks, and you could be on to a winner. You can enjoy free access here and see it for yourself.
If you're worried about the ongoing market volatility, read our Best Investing Advice: Buy, Sell, Or Do Nothing?
Can a stock go negative?
A stock can never fall to a negative value, but if you are a short-seller, you could lose more than you invested.
How do you sell a delisted stock?
If your stock gets delisted, it will usually trade on the "over-the-counter" market, which doesn't provide easy access to buyers.
Can you go into debt from stocks?
If your brokerage account has no margin debt, then no, you won't owe if the company goes bankrupt in virtually all cases.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
