What Is the Effect of Bankruptcy on Stock Holders?
When a company goes out of business, it can have significant effects on the investors of the company. The amount of impact that it has on the investors will depend on the type of bankruptcy that is filed and the actions of the company. Different classes of stockholders will also be affected differently.
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Type of Bankruptcy
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The type of bankruptcy that the company files will have impact the shareholders. If the company files for chapter 7 bankruptcy, this is the liquidation form of bankruptcy. When this happens, the assets of the company are liquidated and creditors are repaid. With this type of bankruptcy, the shareholders may or may not get anything out of their investment. If the company files for Chapter 11 bankruptcy, the company will stay in business but will reorganize its debt structure. In this case, the shareholders may lose some value in their stocks, but they can still trade them after the company emerges from bankruptcy.
Preferred vs. Common Stock
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When you buy stock in a company, you could buy common or preferred shares. Preferred shares do not increase as rapidly in value as common stock, but they receive dividend payments from the company. If you have preferred shares, you are ahead of the common stockholders when a company files for chapter 7 bankruptcy. You have a higher priority when claiming any assets that are held by the company. You will be next in line after the bond holders of the corporation.
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Trading Shares
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When word gets out that a company is about to go into bankruptcy, it can have a large impact on the stock price of that company. If you are a shareholder in the company, you may want to try to get out of your ownership position as quickly as possible. If the company is only filing for Chapter 11 bankruptcy, you may want to hold onto the shares to see how it works out. Some investors like to buy shares in this condition so that they can get a good value and make a large profit if the company rebounds.
Worthless Shares
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If the company files for chapter 7 bankruptcy and you are a common stock holder, there is a good chance that your shares will be worthless. The only chance that you have of getting anything from the shares is if the company happens to have enough assets to pay off all of their creditors, bondholders and preferred shareholders. At that point, you could receive some of your initial investment back. The likelihood of getting anything out of your shares at this point is usually low.
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