Beginners who want to better understand the stock market should pay some time learning about what happens to stocks with extremely low or diminishing value.
There is a whole market around stocks with a low per-share value, and there are also some important liabilities to shareholders when a stock starts to lose value in a major way.
By knowing the rules, you can prepare for situations where something in your portfolio might be seeming to dwindle away to nothing – because that’s usually not a good feeling!
What Is The Lowest A Stock Can Go?
The conventional wisdom, in general, is that a stock can only go to zero, which turns out to be relatively good news for someone who’s holding shares of that stock. In other words, you can only lose the investment that you initially made in that stock, whatever value that ends up being.
Why is that good news?
Consider options traders who sell naked call options contracts or short stock sellers. When stocks move against their expectations, they can lose much more than the value in their accounts! These types of riskier trades and some other derivatives can lose traders much more than the initial purchase price of shares as in the case of a buy-and-hold investor.
So to recap, stocks can only go to zero. They can’t go into negative numbers, and they rarely get all the way to zero in the first place. We’ll talk about that process a bit more.
How Low Can A Stock Go Before Being Delisted?
First of all, delisting refers to a situation where an exchange removes a stock from active trading. Before the stock value ever hits zero, the exchange is likely to stop trading and delist the stock offering itself.
There are other markets for delisted stocks, but let’s keep looking at the process of delisting itself.
Basically, every exchange has its own delisting rules. An exchange might require a stock to maintain a price at one dollar, or even over one dollar.
That’s just part of the requirements for staying listed on an exchange. There are many reasons that stocks might be delisted. Some might be delisted for low values over time, and others might be delisted based on bankruptcy activity. Exchanges may also set other rules like:
· Minimum revenue
· Minimum market capitalization (financial size of the company)
· Minimum number of shareholders
Here’s another interesting thing about delisting – it might not happen all at once. The exchange might send the company a compliance notice, and if things don’t get resolved, the stock is likely to be delisted at a later date.
In any case, the lowest that a stock can go before it’s delisted has to do with particular exchange rules.
What Happens When A Stock Price Goes Below $1?
Again, it depends what exchange the stock is traded on. If the stock is on the New York Stock Exchange, it can only be under one dollar for 30 days before being delisted.
On the other hand, if it’s on the NASDAQ, it will automatically fall into a category of stocks called ‘penny stocks’ rather than being immediately subject to a 30-day delisting rule. Exchanges that allow penny stocks will have certain stock offerings where the share value stays under one dollar, and can stay there indefinitely barring growth or other factors.
Technically these days a penny stock is actually defined as a stock under $5 per share, but that’s an aside.
The philosophy here is that some exchanges believe that the standard should be higher to prevent low-value stocks from being manipulated by aggressive parties. Other exchanges allow penny stocks and participate in the market for those low-value stocks where traders might want to get into a position without putting much money down at the outset of a trade.
What Happens If A Stock Hits $0?
If a stock goes to a zero value, what happens to it partially depends on exchange activity. However, it’s very unlikely that the company will ever be worth anything again.
As the stock price nears zero, the stock may be delisted. People can still buy and sell the stock over over-the-counter or with pink sheets, but they can no longer use the stock in question as an exchange-traded equity. Traders can’t do conventional market day buy and sell orders.
When the stock value does fall to zero, after delisting, the brokerages may take the ticker off of their platforms. Alternatively, a brokerage may neglect to do this type of cleaning up, and shareholders will be left with zero-value stocks in their portfolio.
The basic point is that these stocks are not likely to be worth anything in the future and so whether or not the brokerage cleans the ticker up from its digital platform is sort of a moot point.
What Is The Definition Of A Penny Stock?
Now, let’s talk about penny stocks and what they are, and what they represent in the market.
The technical definition of a penny stock, to many traders, is a stock that has a value of under one dollar per share. However, the official rule these days is that under $5 per share will bucket a stock as a penny stock.
However, there’s also a more contextual definition of penny stocks. They tend to be small companies with small numbers of outstanding shares and small market capitalizations. In general, they will not have the size and power of a more established stock, and that’s why their share prices are so low.
As we mentioned earlier, penny stocks may be more prone to some types of manipulation than established stocks. That’s because even a small change in share value represents a big portion of the overall value of the stock itself. A $0.10 change in a penny stock is much more fundamental than a $0.10 change in a stock that’s worth $50 or $100 per share.
Now that you know a bit about the ins and outs of low-value stocks and what happens when a stock falls to zero, consider how this would affect your portfolio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.