What Happens To Your Stocks When Company Goes Bankrupt?

Your Shares and Bankruptcy

First Published Date : January 10, 2011

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.