What Happens to Stocks That Fall to Zero?

Public stock exchanges such as the New York Stock Exchange and Nasdaq have listing requirements that companies must meet in order for their stock to continue trading publicly. One of the listing requirements these exchanges share is that if a company's stock price falls below $1 per share for 30 consecutive business days, it will receive a notice from the exchange stating that the company has six months to remedy the situation. If the shares continue to lose value, the company eventually will be delisted entirely.

Pricing Basics

A company's stock price reflects the total value of its equity divided by the number of common shares outstanding. The market value of its equity fluctuates based on:

  • Short-term shifts in supply and demand for the company's stock
  • Long-term fundamentals, such as the company's earnings and revenue growth.

In one sense, the stock is worth whatever investors are willing to pay for it. However, there are different types of investors participating in the market. There are long-term, buy-and-hold investors, and there are short-term investors who may buy and sell the stock many times during a single trading day. If a company's market value of equity is valued by the market to be $1 billion, and it has 500 million shares outstanding, its stock price equals $2 per share -- $1 billion market value of equity divided by 500 million shares outstanding. If the market value declines to $500 million, the stock's price falls to $1 per share, which is the threshold for non-compliance with listing requirements, at which point it would receive notice from its respective stock exchange.

Other Influences

Even if management believes that the long-term fundamentals of the company, such as earnings and revenue growth, should lead to an increase in the stock's value, it can not predict this with absolute certainty because other factors influence the stock's price. For example, if the overall economy is experiencing a downturn and the stock market is trending downward, the company's stock will likely trend downward also. Common stocks tend to move in the same general direction as the overall market. The degree to which a company's stock moves in tandem with the overall market is measured by beta.

Raising the Price

The first step a company can take to boost its share price is a reverse stock split. In a reverse stock split, shareholders are notified that their common stock holdings are merged at a given ratio. For example, in a 1:2 reverse stock split, a shareholder holding 100 common shares now holds 50 common shares. The value of the stock remains unchanged. If the market value per share was $1 per share before the reverse stock split, the shareholder's interest was worth $100 -- 100 common shares multiplied by the $1 per share stock price. After the reverse stock split, the shareholder's interest is still worth $100 -- 50 common shares multiplied by $2 per share -- because the stock price doubles to reflect the merged value of the shares. Market value remains unchanged. In this example, now that stock's price is $2 per share, it is back in compliance with the exchange's listing requirements.

New Exchanges

If the stock price continues to decline, it can transfer to a different stock exchange for smaller companies. Eventually, as the stock's market value falls below a certain threshold, it only can be traded over-the-counter, through informal networks of broker-dealers willing to buy and sell stocks in companies with no listing requirements, and those that are not required to disclose financial information.

Zero Value

If the stock reaches a value of zero, trading can cease and the company can continue to operate as a privately held company, or the company may file for bankruptcy. A company's stock reaching zero value does not mean that the company must file for bankruptcy. It simply means that the equity value of the company has been wiped out, and if the company wants to raise new equity capital, it must re-issue common shares to new shareholders.

Tip

In some cases, if a company's stock hovers at a zero level, speculative investors will offer to buy shares at extremely low prices, such as a thousandth of a penny per share. These investors are hoping that when the company returns to profitability or re-issues new common shares, it will perhaps compensate the previous class of equity shareholders.

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