What Happens to Stocks That Fall to Zero?

by Victoria Duff

Many stocks trade at prices below $1. Some trade as low as $0.0001, but that is still not zero. The legal framework of a corporation trading on the public securities markets is called a publicly trading shell, and it has value even if the underlying company is out of business or floundering. Because the shell has value, the company will not trade at zero, even though the investor who owns the stock may feel it is worthless.

Public Shells

When a corporation wants to trade on the public markets, it has two choices of how to become a public company. It can file an S-1 registration statement with the Securities and Exchange Commission, or it can do a reverse merger into an already trading public shell. Such a public shell is the legal framework that is left after its company has gone bankrupt or has ceased doing business. These trading shells are generally found on the Pink Sheets but may also be trading on the over-the-counter bulletin board. Because they are still able to trade without an operating company, they have value, so the stock never trades at zero.

Listing Requirements

A company that is trading on an exchange has a certain set of listing requirements it must maintain. If those requirements are not met, the stock is delisted from that exchange. One of those requirements is stock bid price. If the stock's bid price falls below the required level, the company applies for listing on a lower exchange where the required bid price is lower. If the stock's price falls below the lowest exchange's requirement, it trades over-the-counter on the Pink Sheets as a penny stock. The listing requirement, regarding price, on the New York Stock Exchange is $5 and on NASDAQ it is $1, though during times of crisis these exchanges have allowed stocks to temporarily trade below their price requirements without delisting.

Bankruptcy

If your investment is failing and the stock price has dropped below the listing requirement for its exchange, it will either trade on the Pink Sheets or will make application to trade on another exchange, such as NASDAQ, where the required bid price is lower. If the company goes into bankruptcy or ceases operations, it will contract with a market maker to maintain a market in the public shell, keeping the price at a minimum as low as $0.0001 per share. It must maintain a market maker and a bid price to retain its status as a publicly trading shell. It will be trading over-the-counter, and it may be difficult to find a bid or sell the stock, but as long as it is trading, it does not have a price of zero.

Trading Shells

If your investment has turned into an empty trading shell, you might receive a letter announcing that there will be a merger between your company and another company. This is called a reverse merger, in which the new company buys the public shell and operates inside that legal framework. The next thing that normally happens is the new company does a reverse stock split, perhaps one new share for 40 old shares, and the old stockholders will find themselves holding a fraction of the number of shares they owned in the original company. For example, you may have owned 4,000 shares of OldCo, but after the reverse merger and reverse stock split, you now own 100 shares of NewCo. Depending on how the new company performs, you may make all your original investment back, plus a profit; however, that is the best-case scenario. Ordinarily, you would be fortunate to make back a small portion of your original investment.

Reaching Zero

Whether the value of zero is actual, or only a perception of zero-value by the unhappy investor who owns the stock, it is the same as any other stock loss. To realize that capital loss, sell the stock at market or try to qualify it as worthless under IRS rules. It is sometimes difficult to prove to the IRS that a stock is worthless, so many people solve the problem by selling it privately to a relative for a penny. This allows you to take a capital-gains loss, but before you do this, check with your accountant. Capital losses can be written off against capital gains and ordinary income at tax time. The rules for applying capital losses to your taxes change frequently, and it is wise to time your stock sale to provide you the best tax advantage.

About the Author

I have 14 years of experience working with alcoholics and would like to write about this subject. I have included some of my articles on business and Internet marketing, but I am also capable of writing and editing other subjects.

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