What Happens If a Stock Goes to Zero?

Every financial advisor or professional investor will tell you the same thing: all investing comes with inherent risk. And when you’re buying individual stock — rather than investing in index funds or ETFs, for example — it’s more likely that one of your investments will end up losing you money. So what happens when a stock doesn’t just lose you money, but goes to zero and wipes out completely?

What happens if a stock goes to zero?

When a stock's price falls to zero, a shareholder's holdings in this stock become worthless.

Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.

A delisted stock loses the privilege of appearing on popular stock exchanges and because of this, no buying or selling of this stock can occur through typical methods. Instead, the stock is considered over-the-counter (OTC) and appears on a separate OTC bulletin board. This bulletin board is known as the “pink sheets” by speculators who want to engage in bargain trading on alternative exchanges.

If a stock can fall to zero, can it fall below zero? In other words, can you lose more than you initially invested in a stock? As long as you’re not borrowing money on margin from your broker to make your stock purchases, the answer to both of these questions is no.

What this means for investors

The volatility of the stock market is unavoidable. If you’re choosing to invest in it, you have to be prepared to accept a certain level of risk. It’s also true that some stocks will fall precipitously and lose all their value. That said, whether or not an investor experiences financial loss or gain in the case of a stock reaching zero depends on whether an investor is in a long- or short-term position.

The average investor (i.e., the long-term investor) is usually devastated to watch their stock plummet, but a stock plummeting might be good for a short-term investor. This is because they try to sell stocks “short.”

In a short sale, an investor borrows shares in a company and sells them, predicting that the stock will fall in value so that they can then buy the stock at a lower price, return the loan, and keep the difference for themselves as profit.

Shorting stocks is very risky. If we take a $10 stock, for example, the maximum an investor can lose if that stock falls is $10. But if you’re “short” and the stock goes to $100, you lose $90. The hedge fund Melvin Capital closed in 2022 after shorting its shares of AMC Entertainment and other “meme” stocks, only to see these stocks skyrocket in price, ultimately leading to billions in losses.

What determines a stock’s price?

Supply and demand economics are the main driver in what makes stock prices go up and down. If demand is high, for example, people buy stocks, causing the price of that stock to rise. If demand is low for a certain stock, investors might choose to sell, causing prices to fall — and sometimes with dramatic speed.

Companies sustain demand for their shares by running dependably profitable businesses. But this is difficult to do, especially in a poor economy. Most startups fail and no company — no matter how established — will report increased earnings for every quarter of their existence.

What can cause a stock to lose value?

Again, a stock loses value if demand for that stock decreases. Contributing factors might include:

• Slowed growth in a company’s revenue — or a loss in revenue.
• Widespread perception that a company’s shares are overvalued, especially if a speculative growth company is involved (e.g., the dot-com bubble).
• Negative investor sentiment following a shakeup in leadership, legal issues, or a management scandal.

Who buys stocks that go to zero?

When a stock reaches zero or dips to a level that disqualifies it from being listed on a major exchange, its shares move to over-the-counter markets. This name is derived from the fact that trades on these markets are made between two parties directly — without a central exchange. Examples include the OTCQX, OTCQB, and OTC Pink marketplaces. Buyers are often scarce in OTC markets and prices can swing wildly on just a few trades.

These volatile markets remain popular with speculators hoping to make quick profits on companies that others have left for dead (known in the industry as “penny stocks”). Penny stocks are shares in companies that trade for less than $5. They are often very illiquid, meaning they don’t trade often. As volume declines, fewer traders are willing to take a chance on companies trading for a few dollars and these stocks can often fall to zero due to lack of interest.

Examples of stocks that went to zero

Enron

A large energy company that peaked in the 1990s, Enron hid huge losses and toxic assets of no value behind creative accounting practices. Enron stock was trading as high as $90.75 in 2000. When the company began reporting massive losses, analysts and investors became suspicious of the accounting practices it used to value its assets and dumped the stock. Enron was trading at $0.26 just before it declared bankruptcy in December 2001.

WorldCom

This telecommunications company perpetrated the largest case of accounting fraud in U.S. history. WorldCom inflated its net income and cash flow by recording expenses as investments to conceal its losses. In 2001, it reported $1.3 billion in profits even though it was losing money. Its stock price fell from over $60 to less than $1 before the company declared bankruptcy in 2002.

How does a company become worthless?

When a company can no longer operate profitably, it may be forced to declare bankruptcy. At this point, the company is essentially worthless until it decides to restructure or fold altogether. Companies in this precarious situation have two choices:

• Chapter 11 bankruptcy, also known as a reorganization.

  Companies choose this route when they work with creditors to renegotiate their debts in hopes of returning to profitability. Unfortunately, stockholders often see very little return in this scenario. In fact, much of the time, a bankrupt company will cancel its stock, making investor shares worthless.

• Chapter 7 or liquidation.

  If a company finds itself in a situation that is too dire for restructuring, it is forced to sell off its assets in order to repay creditors such as banks, bondholders, and in some cases, even preferred stockholders. In most cases, holders of common stock get nothing.

Preventing a share price from going to zero

When a company’s share price starts to decline, they can take steps to avoid being relegated to the OTC market. If their stock does end up relegated to the OTC market, it’s likely the volume of their stock will dry up and they’ll suffer further losses. Some steps they might take to avoid this include:

• Reverse splits.

  A company may initiate a reverse stock split to decrease their number of outstanding shares and increase the price per share. As a result, shareholders lose a certain number of shares, but the value of each share goes up, raising the stock price for the company. For example, in a 1:2 reverse stock split, a shareholder with 100 common shares would end up having 50, but each share's value would double.

• Share buybacks.

  If company managers believe a stock is dramatically undervalued for no reason, they might repurchase some of the shares at the reduced price and then reissue them once the price has rebounded. Buybacks are increasingly popular in equity markets. Investors should be on the lookout for companies with buyback plans in place because it’s possible that demand can lift share prices.

• Improve financial performance.

  If a company increases sales and revenue without increasing costs, it will increase its return on investment (ROI), making its stock more attractive to investors. Companies with slumping share prices will often bring in turnaround experts that they pay in the form of equity, providing these professionals with huge incentives to fix operations. Peloton, for example, brought in Barry McCarthy, the former chief financial officer at Spotify and Netflix, to stem losses and streamline operations in early 2022.

What this means for you

The possibility of your stock plummeting to zero shouldn’t scare you from investing, but it is a reminder of the inherent risks associated with the stock market. If you’re concerned over your ability to keep close tabs on your investments but still want to reduce risk, you can work with investment pros at Titan to actively manage your capital. Our team will help you make stock choices that are consistent with your risk tolerance and that aim to consistently outperform the market. Get started today.