Table of Contents
Stocks can lose all of their value, or fall all the way to zero. When that happens, theyâre effectively worthless, and in all likelihood, the company will declare bankruptcy. Itâs possible that investors lose their investment, in that case.
Sometimes when a stock goes down in value it can present an investment opportunity, but in other cases the stock could fall to zero and never recover. In the latter case, it may benefit investors to sell before the stock price falls all the way down to zero.
Key Points
⢠A stock reaching zero means total loss of investment value, leaving shareholders with nothing.
⢠Shares may be delisted from stock exchanges if prices fall below specific thresholds.
⢠Companies typically file for bankruptcy protection before stock hits zero.
⢠Margin trading or short selling can result in additional financial losses for investors beyond the initial investment.
⢠Shareholders often receive no compensation during the liquidation of company assets.
What Causes a Stock to Fall to Zero?
When a stock falls to zero, it doesnât mean that the company is worth nothing. Some companies with very low stock values are still earning money or possess assets. And, some investors buy penny stocks that have extremely low prices.
What happens to a company when stock prices fall to zero? If a company continuously spends more money than it earns, and investors sell off the stock, ultimately, that can lead to the company going bankrupt. Most companies file for either Chapter 7 or Chapter 11 bankruptcy before their stock reaches $0.00.
Chapter 7 Bankruptcy
With a Chapter 7 bankruptcy filing, the company must sell off its assets until it can repay lenders and creditors. The order that stakeholders get paid is: creditors, bondholders, preferred stockholders, common stockholders.
This means that if the asset sale doesnât bring in enough money to pay everyone, itâs likely that common shareholders wonât receive a dime. In this case, stockholders lose all the money they had invested in that stock.
Under Chapter 7, stock trading and all business activities must be put on hold.
Chapter 11 Bankruptcy
Under a Chapter 11 bankruptcy, the company negotiates loan terms with its creditors in order to avoid selling off assets. With Chapter 11, companies can still conduct business and their stock can be traded.
Once a company files for Chapter 11, it is likely that the stock will continue to fall, since many investors wonât have much faith in the business. Sometimes shares are canceled with a Chapter 11 filing. In that case, investors lose all the money they had put into the stock.
Even if a company files for bankruptcy before its stock falls to zero, their attempts to salvage the business may ultimately fail and the stock could become worthless. However, it can take a strong team and business model to go public and get listed on stock exchanges in the first place, so some bankrupt companies may have the potential to make a comeback.
Some companies with very low stock prices get acquired by larger companies before their stock falls to zero. Even a company with a low stock might have a promising product or service that a larger company is able to sell successfully. One example of this is when Alphabet acquired FitBit in 2021.
đĄ Quick Tip: All investments come with some degree of risk â and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
What Happens to a Company When Stock Prices Fall to Zero?
Some stock exchanges delist stocks if they fall below a certain level. For example, the New York Stock Exchange will remove a stock if its share price falls below $1 for 30 days in a row.
And, as mentioned above, if a company files for Chapter 7 bankruptcy, its stock will be delisted temporarily. Fortunately, it is not possible for a stockâs price to go into the negative territory â under zero dollars in value, that is.
Still, if an investor short sells or uses margin trading, they may lose more than they invested. For this reason, margin trading and short selling are risky investment strategies.
Short selling is when an investor predicts that a stock is going to decrease in value. So, rather than buying the stock, they âbetâ that it will go down. If the stock does in fact go down, they make money.
But, if the stock ends up increasing in value, they lose money. Potentially, an investor in this scenario could lose more money than they put into the initial short sell.
Margin trading is when an investor borrows money from the brokerage firm to trade stocks. If the investor makes a trade that doesnât go in their favor, they can end up owing the brokerage firm money.
How Low Can a Stock Go?
Stock prices can fall all the way down to zero. That means the stock loses all of its value and a shareholderâs earnings are typically worthless. In this case, the investor loses what they invested in the stock.
Reasons for a Stock Losing Value Down to Zero
There are a number of reasons that may come into play to make a stock fall to zero, including:
• Losses in the companyâs revenue or earnings, especially if the losses are persistent
• A perception in the market that the stock is overvalued
• Management issues, shake-ups in the companyâs leadership positions, scandal, fraud â in short, anything that can make investor sentiment turn negative
For investors, these are all signs a stock is underperforming and red flags to watch out for.
Types of Stocks More Likely to Fall to Zero
What is a stock that falls to zero? Every stock comes with risks, but some are more risky than others. Besides companies on the brink of bankruptcy, there are certain types of businesses that may have a higher chance of becoming worthless.
Knowing what to look for and researching and evaluating stocks before buying is key to building a resilient portfolio. Some of these higher risk stocks might include:
Companies With Weak Business Models
Even if a stock is currently performing well, it may fall in the future if the business model is fundamentally flawed. For this reason, many investors prefer to research a companyâs practices, team composition, and business model before investing in its stock.
Penny Stocks
Stocks that trade below $5 are known as penny stocks. These low price stocks tend to be very volatile, as the companies that issue them have low or no profit.
Sometimes penny stocks can even turn out to be scams.
Buying the Dip
Rather than selling stocks when the market declines, some investors believe it can be a good idea to buy while the market is low. By buying the dip, as itâs known, investors pay less for stocks.
And, since these stocks still have the potential to go up in value as the market recovers after the decline, they can be preferred by long-term investors who may have more time to let their portfolio go back up in value.
However, if a company is going bankrupt or otherwise likely to fall to zero, itâs unlikely to offer a strong return on investment.
Itâs also very difficult to time the market, so a trader might buy in when they think the market has hit bottom, only to watch it continue to go down.
Generally, building a diversified portfolio can offer higher returns on average over time than trying to time the market based on shorter-term trends or dips.
Examples of Stocks That Fell to Zero
There are two particularly infamous examples of stocks that fell to zero or close to it:
Enron
In the 1990s, Enron, an energy company, hid massive losses by using accounting tricks. At one point, its stock price was over $90. In 2001, analysts and investors became suspicious and began asking questions. That same year, the company reported huge losses, and its stock plummeted to $0.26 right before it declared bankruptcy.
World Com
This telecom company falsely inflated its cash flow and net income by listing expenses as investments to hide losses. Its stock price fell from more than $60 a share to less than $1 before the company declared bankruptcy in 2002.
đĄ Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
How to Help Avoid Holding a Stock Thatâs Falling to Zero
While itâs true that the market is impossible to predict, there are some measures that investors can take to protect themselves from losses â especially in the case of a stock spiraling towards zero. Below are some common preventative investment measures.
Stop Losses
Knowing when to sell a stock is important. Investors can set up a trade to automatically sell shares if a stock reaches a specific price. This type of trade is called a stop loss. Itâs a strategy that could help prevent losses in the case of an individual stock or overall market drop.
There are multiple types of stop losses, including trailing stops and hard stops. Trailing stops move the stop level up as the stock rises in value, but stay in place if the stock falls. Hard stops are fixed at a specific price and will execute if the stock falls to that price.
Limit Orders
Limit orders allow investors to set the price at which they want to buy a stock. An investor selects the price and the number of shares they wish to buy. In practice, the order only executes if the stock then hits that price.
This is one way for traders to step away without worrying that theyâll be buying in at a price they didnât want.
Put Options
A put option is a type of order that gives traders the option to sell or short-sell a specific amount of stock at a specific price, within a certain time frame. If a stock decreases in value in this case, the trader can still sell it at a higher price than it previously held. Note that options are high risk investments for more experienced investors.
Diversifying Asset Holdings
In an effort to try to prevent bigger losses, investors may want to diversify their portfolios into a mix of non-correlated assets â dividing their holdings between assets at a higher and lower risk of fluctuating in value.
In a diversified portfolio, if one asset class decreases in value, the other types may not. Over time, the ups and downs of each asset could possibly balance the losses in each.
The Takeaway
Stocks can lose all of their value, or fall all the way to zero. When that happens, theyâre effectively worthless, and in all likelihood, the company will declare bankruptcy. Itâs possible that investors lose their investment, in that case.
By researching companies and setting up a portfolio according to oneâs personal risk tolerance, and then keeping tabs on the assets in that portfolio to monitor their performance, it may be possible to help hedge against a stock sinking down to zero.
Ready to invest in your goals? Itâs easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesnât charge commissions, but other fees apply (full fee disclosure here).
FAQ
At what point does a stock become worthless?
A stock becomes worthless when it falls to zero and has no value. In this case, an investor typically loses the money they invested in the stock.
How low can a stock go before being removed?
Some stock exchanges delist stocks if they fall below a certain level. The New York Stock Exchange will remove a stock if its share price falls below $1 for 30 days in a row, for instance.
Do you owe money if a stock goes negative?
No. A stock price canât go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, usually lose whatever money they invested in the stock if the stock falls to zero, especially as the company may declare bankruptcy.
Image credit: iStock/MicroStockHub INVESTMENTS ARE NOT FDIC INSURED ⢠ARE NOT BANK GUARANTEED ⢠MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
šClaw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you donât make a selection in 45 days, youâll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Investâs automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fundâs returns. Check out each fundâs prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOIN-Q325-002