Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)

Can a stock lose its value?

The answer to this question, in theory at least, is a pretty straightforward: Yes.

Stocks are able to lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, in reality shareholders often do receive some residual payment back, but this is usually just pennies on the dollar. This fact should not scare you off from investing in stocks, or investing in general. However, we would be lying if we claimed that stocks carry no risk (although some, of course, carry more than others). Read on to see how a stock's price can get wrecked and approach zero.

Key Takeaways

  • Supply and demand determine the value of a stock in the market, with higher demand driving the price higher in turn.
  • Lower demand causes a stock to lose some value—and plummeting demand could cause it to lose all value.
  • Since a stock's price is meant to reflect its future profitability and growth, companies that go bankrupt can become effectively worthless.
  • This is often a calamity to those who are holding long positions and hoping a stock price will rise.
  • A massive drop in stock value can, however, be a boon to investors who are short the stock.

Determining Stock Price and Bankruptcy

To help you understand why a stock can lose all its value, we should review how the stock price is determined. Specifically, the value of a stock is determined by the basic relationship between supply and demand. If a lot of people want a stock (demand is high), then the price will rise. If a lot of people don't want a stock (demand is low), then the price will fall.

If a stock's demand sinks dramatically, it will lose much (if not all) of its value. The main factor determining the demand for a stock is the quality of the company itself. If the company is fundamentally strong, that is, if it is generating positive income, its stock is less likely to lose value.

So, although stocks carry some risk, it would not be accurate to say that a loss in a stock's value is completely arbitrary. There are other factors that drive supply and demand for companies. These have a lot to do with a company's fundamentals and growth outlook. As long as these are favorable and positive, a stock's price tends to rise. If, however, a company can no longer operate profitably, there is a chance that it will be forced out of business and declare bankruptcy.

When a company declares bankruptcy, it doesn't automatically mean that is absolutely worthless. The company can still hold assets that could be sold, brand recognition, and skilled employees. As a result, companies will often negotiate with their creditors to renegotiate their debts and restructure the company to emerge from bankruptcy. If the company is unable to achieve this, it may be forced to sell off its assets in a fire sale to repay creditors (such as banks, bondholders, and preferred stockholders). Only once these parties have been repaid can common stockholders receive any compensation based on what's left. If there is nothing left, the stock is worth zero.

Companies that are fundamentally strong are less likely to completely lose value than those that are on shakier legs, to begin with.

Impact on Long and Short Positions

The effects of a stock losing all its value will be different for a long position than for a short position. Someone holding a long position (owns the stock) is, of course, hoping the investment will appreciate. A drop in price to zero means the investor loses his or her entire investment: a return of -100%.

Conversely, a complete loss in a stock's value is the best possible scenario for an investor holding a short position in the stock. Because the stock is worthless, the investor holding a short position does not have to buy back the shares and return them to the lender (usually a broker), which means the short position gains a 100% return. Bear in mind thatif you are uncertain about whether a stock can lose all its value, it is probably not advisable to engage in the advanced practice of short selling securities. Short selling is a speculative strategy andthe downside risk of a short position is much greater than that of a long position.

To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

Even if a company goes bankrupt, common shareholders will often receive some sort of residual compensation, but only cents on the dollar. If a company files Chapter 11 bankruptcy, for example, a judge may restructure the firm, allowing it to continue operations after repaying creditors. If the company declares Chapter 7, the company is dead, and so are your shares.

Real-World Example of a Stock Losing All Its Value

Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s. By the early 2000s, the company was riding high and its stock was seeing all-time highs.

What people didn't know yet, however, was that Enron was using accounting tricks to hide massive losses and holdings of toxic assets. By 2001, analysts and investors began to question Enron's mark-to-market accounting practices and became suspicious of the company's earnings. In 2001, the company started to report massive quarterly losses, which quickly spiraled out of control.

At Enron’s peak, its shares were worth $90.75 in 2000; just prior to declaring bankruptcy on Dec. 2, 2001, they were trading at just $0.26.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (1)

Can a Stock Go Negative?

Technically, a company that has more debts and other liabilities than assets is worth a negative amount. Shares of its stock, however, would only fall to zero and would not turn negative.

What Happens If a Stock Price Goes to Zero?

If a stock's price falls all the way to zero, shareholders end up with worthless holdings. Once a stock falls below a certain threshold, stock exchanges will delist those shares. They may continue to tradeover-the-counter (OTC), and even bankrupt companies may see their shares trade for above zero for some time as speculators make wild bets on a miracle recovery.

Can You Lose All Your Money in Stocks?

Technically, yes. You can lose all your money in stocks or any other investment that has some degree of risk. However, this is rare. Even if you only hold one stock that does very poorly, you'll usually retain some residual value. The best way to ensure that you don't experience massive losses in stocks is to be well-diversified, research the holdings you invest in, and set thresholds to the downside whereby you will cut your losses and exit positions.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)

FAQs

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? ›

A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

What happens if you short a stock and it goes down? ›

If the stock price falls, you'll close the short position by buying the amount of borrowed shares at the lower price, then return them to the brokerage. Keep in mind that to earn a profit, you'll need to consider the amount you'll pay in interest, commission and fees.

How do short positions affect stock prices? ›

But when you short a stock, its price can keep rising. In theory, that means there's no upper limit to the amount you'd have to pay to replace the borrowed shares. For example, you enter a short position on 100 shares of stock XYZ at $80, but instead of falling, the stock rises to $100.

Can a stock lose all its value? ›

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.

Can you lose shares of stock? ›

If you do not use borrowed money, you will never owe money with your stock investments. Stocks can only drop to $0.00 per share, meaning you can lose 100% of your investment but not more than that, seeing as the stock cannot be of negative value.

What is a long position and a short position? ›

Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value.

Who loses when shorting a stock? ›

Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.

How do long and short positions contrast in stocks? ›

Open positions can be long or short. Long positions involve owning a security before being sold; they profit when there is an increase in price. Short positions involve borrowing a security before being sold, to be bought back at a lower price: they profit when the security falls in price.

How long can you short a stock? ›

There's no specific time limit on how long you can hold a short position. In theory, you can keep a short position open as long as you continue to meet your margin requirements. However, in practice, your short position can only remain open as long as your broker doesn't call back the shares.

What is a short position in stocks? ›

A short position refers to a trading technique in which an investor sells a security with plans to buy it later. Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term.

What happens if you lose 100% of your stock? ›

A drop in price to zero means the investor loses his or her entire investment: a return of -100%. To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

Has a stock ever come back from $0? ›

Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.

How does the stock market lose value? ›

By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Who gets the money when stocks lose? ›

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.

What stocks went to zero? ›

Some well-known examples exist in recent public memory, such as Lehman Brothers, Blockbuster, and Enron. All of these were public companies that "went to zero” for different reasons. If the entirety of your investment was in one of these companies, then your investment went to zero.

What happens if I short a stock and it goes to 0? ›

If the stock goes to zero, you'll suffer a complete loss, but you'll never lose more than that. By contrast, if the stock soars, there's no limit to the profits you can enjoy.

What happens if I short a stock and it goes to $0? ›

For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back.

What happens if a short seller can't buy back the stock? ›

What if someone sells short and then the price goes way up, so high that the short seller cannot afford to buy back the stock? Then the short seller is bankrupt, and the person they borrowed the stock from is a creditor who has a claim.

Who pays out when you short a stock? ›

The short seller borrows those shares from an existing long and pays interest to the lender. This process is often facilitated behind the scenes by a broker. If a small amount of shares are available for shorting, then the interest costs to sell short will be higher.

Can shorting a stock ruin a company? ›

But just like stock buyers can cause a company to succeed, short sellers sometimes cause companies to fail. Short sellers can prevent the company from selling stock to stock buyers. By lowering the market capitalization of a company, they can reduce a potential lender's valuation of the company.

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