How to Buy Bankruptcy Stocks
Buying shares in bankrupt companies is highly risky but possible, even though the stocks might not be listed on a major stock exchange. Bankrupt stocks often appear on the "pink sheets" and can be purchased like other stocks.
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Instructions
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Determine your risk tolerance. Before considering buying stock in a company that is bankrupt, it is very important to evaluate the risks associated with such an investment. When a company is bankrupt, common shareholders are the last investors in the "seniority" list to be paid. Consequently, if the business completely ceases operations, there is a real possibility that nothing will be left to pay shareholders. Consequently, buying shares in bankrupt companies is very speculative and very risky.
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Research the potential investment. In order to better gauge the amount of risk associated with an investment and the potential for profits, it is very important to study the company's fundamentals. This includes financial statements but also should include an assessment of the company's potential for making profits in the future. Filings with the Securities Exchange Commission (such as 10-k's) are excellent resources.
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Determine the liquidity of the stock. Often bankrupt companies are removed from the major stock exchanges and are only available over-the-counter in what are commonly called the pink sheets. Because these shares are not on major exchanges, they are often more difficult to buy and sell. This can harm investors because the buy/sell spread can be large. Consequently, it may be difficult to find shares at the price point at which one wants to buy. Likewise, when one is ready to sell, it may be difficult to find someone who will pay the price that one expects.
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Tips & Warnings
Stocks in the midst of bankruptcy are very risky and should be considered speculative and not part of one's "nest egg."
