What Happens To Your Stocks When Company Goes Bankrupt?
January 10th, 2011 Posted in Personal Finance and Investing
Your Shares and Bankruptcy
Before buying stocks, you should consider the various risk factors. A company going bankrupt or going through debt restructuring presents serious risk, for example. Today, I will briefly discuss what can happen to your shares should the above happen and how to minimize your risks.
Bankruptcy or Restructuring
Here are some scenarios that may happen in case of bankruptcy or restructuring:
- When bankruptcy happens, creditors have priorities before shareholders when it comes to getting their money back. Preferred shareholders are in a more advantageous position than common shareholders to get back their money. Preferred shareholders may get little (or none); however, it is unlikely that common shareholders will get anything at all. If the company is liquidated (totally out of business), both shareholders are prone to not get anything.
- If the company continues to operate under bankruptcy protection to restructure itself (meaning getting out of debt), most of the time it issues new shares when it emerges as a restructured company. Old shares often get cancelled or delisted in this situation. Investors are likely to lose everything.
How To Protect Yourself
Any type of investment involves risks. Though it may not be possible to eliminate your risks completely, you may be able to lessen your risks to certain degrees by doing the following:
- Know what you are getting into before buying anything.
- If you do not understand the company, or if it seems to be too complicated business model, most likely it is not your cup of tea.
- If you do not have the financial expertise to pick stocks or buy investment products, seek advice from a qualified and trustworthy financial professional.
Becoming a successful investor is an ongoing learning process. Always keep learning and broadening your financial horizon.
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2 Responses to “What Happens To Your Stocks When Company Goes Bankrupt?”
By Alex Hung on Mar 14, 2011
Shareholders get second priority in the event of company filing bankruptcy. Risk being a likely part of investment it is best to be prepared for the worst and survive the loss. Though as said in the blog we could learn from the mistakes, next time it’s a step take cautiously. Kudos for giving additional tips on reducing and minimizing the risk factors.