When a stock is delisted, that means it’s been removed from its exchange. All publicly traded stocks are listed on an exchange. In the United States, that typically means the New York Stock Exchange (NYSE) or the Nasdaq.
There are different reasons for delisting stock, it can occur voluntarily or involuntarily. Owning a delisted stock doesn’t mean you can no longer trade it, but it does change how trades take place. If you own a delisted stock, it’s important to understand what it may mean for your portfolio.
How Stock Listings Work
Before diving into stock delisting, it’s helpful to know more about how stocks get listed in the first place. Stock exchanges can either be physical or digital locations in which investors buy and sell stocks and other securities. The NYSE is an example of a physical exchange, while the Nasdaq is an electronic stock exchange.
To get listed on any stock exchange, companies must meet certain requirements. For example, Nasdaq-listed companies must meet specific guidelines relating to:
• Pre-tax earnings
• Cash flows
• Revenue
• Total assets
• Stockholder equity
• Minimum bid price
Companies must also pay a fee to be listed on the exchange. The NYSE has its own requirements that companies must meet to be listed.
Once a stock is listed, it can be traded by investors. But being listed on an exchange doesn’t guarantee the stock will remain there permanently. Stocks get added to and removed from exchanges fairly regularly.
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What Does Delisting a Stock Mean?
When a stock is delisted, either the company itself or the exchange decides to remove the stock from the exchange.
Exchange-Initiated Stock Delisting
When an exchange delists a stock, it’s typically because it no longer meets the minimum requirements for listing or its failed to meet some regulatory requirement. Using Nasdaq-listed stocks as an example, a delisting can happen if a company’s pre-tax earnings, market capitalization, or minimum share price fall below the thresholds required by the exchange.
Exchanges set listing requirements to try and ensure that only high-quality companies are available to trade. Without stock listing requirements, it would be easier for financially unstable companies to find their way into the market. This could pose a risk to investors and the market as a whole.
In delisting stocks that don’t meet the basic requirements, exchanges can minimize that risk. When and if a company addresses the areas where it falls short, it can apply for relisting. Assuming it meets all the necessary requirements, it can once again trade on the exchange.
Exchanges typically give companies opportunities to rectify the situation before delisting stocks. For example, if a company is trading under the minimum bid price requirement, the exchange can send notice that this requirement isn’t being met and specify a deadline for improvement. That can help companies that experience temporary price dips only to have share prices rebound relatively quickly.
Company-Initiated Stock Delistings
A delisted stock can also reflect a decision on the part of the listed company. There are different reasons a company voluntarily delists itself. Scenarios include:
• A move from public to private ownership
• Merger with or acquisition by another company
• Bankruptcy filing
• Ceased operations
In some cases, a company may ask to be delisted as a preemptive measure if it’s aware that it’s in danger of being delisted by the exchange. For example, if the latest quarterly earnings report shows a steep decline in market capitalization below the minimum threshold, the company may move ahead with voluntary delisting.
What Happens If a Stock Is Delisted?
Once a stock has been delisted from its exchange, either voluntarily or involuntarily, it can still be traded. But trading activity now happens over-the-counter (OTC) versus through an exchange.
An over-the-counter trade is any trade that doesn’t take place on a stock exchange. Investors can trade both listed or delisted stock shares over-the-counter through alternative trading networks of market makers. The OTC Markets Group and the Financial Industry Regulation Authority (FINRA) are two groups that manage OTC trading activity.
Unless the company that issued a now-delisted stock cancels its shares for any reason, your investment doesn’t disappear. If you owned 500 shares of ABC company before it was delisted, for example, you’d still own 500 shares afterward. You could continue trading those shares, though you’d do so through an over-the-counter network.
What can change, however, is the value of those shares after the delisting. Again, this can depend on whether the exchange or the company initiated a delisting, and the reasoning behind the decision.
For example, if a stock is being delisted because the company is filing for bankruptcy its share price could plummet. That means when it’s time to sell them, you may end up doing so at a loss.
Even if a stock’s value doesn’t take a nosedive after delisting, it can still be a sign of financial trouble at the company. If you own delisted dividend-paying stocks, for instance, dividend payments may shrink or dry up altogether if the company begins making cutbacks to preserve capital or reduce expenses.
What to Do If a Stock You Own Is Delisted
If you own shares in a company that delists its stock, it’s important to consider how to manage that in your portfolio. Specifically, that means thinking about whether you want to hold on to your shares or sell them.
It helps to look at the bigger picture of why the reason for the delisting and what it might say about the company. If the company pulled its stock because a bankruptcy filing is in the works, then selling sooner rather than later might make sense to avoid a sharp drop in value.
Also, consider the ease with which you can later sell delisted stock if you decide to keep them. Some online brokerages allow you to trade over-the-counter but not all of them do. If you prefer to keep things as simple as possible when making trades, you may prefer to unload delisted stocks so you no longer have to deal with them.
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The Takeaway
When a stock becomes delisted, it’s removed from an exchange, either because it no longer met the requirements of the exchange, or because the company chose to delist for financial reasons. You can still trade a company after it’s delisted, but transactions occur over-the counter, rather than on an exchange.
Knowing about delisted stocks and companies can be helpful for investors of all types. It doesn’t necessarily mean that they need to invest in those companies, but broadening your knowledge about the markets is almost never a bad idea.
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