While stock market fluctuations can be frightening for investors, those who own stocks generally do not need to worry about losing more than the amount of money they initially invested. The mechanisms by which stocks are purchased and traded, combined with the legal protections afforded owners of a public corporation, ensure that stock prices will never go below zero.
Stock Price Basics
By holding shares of common stock in a publicly traded company, an individual owns a percentage of the common equity in that company. Thus, with some exceptions, one who owns half of the outstanding shares of stock of a company owns half of the company: if the company doubles in value, the investor's stock value will theoretically also double. Daily stock price fluctuations reflect the market's changing valuation of an individual share of stock: If a stock's price falls 10 percent, that means investors believe the company's value has fallen 10 percent.
The Corporate Shield
While stock prices fluctuate to reflect changing market assessments of the value of a company, a stock's price can never go below zero, and thus an investor cannot actually owe money due to a decline in stock price. Because corporate law shields shareholders in these cases from personal liability, creditors of a public company -- while they can go after the assets of the business itself -- cannot seek money from owners of stock. If a company goes bankrupt, its stock can conceivably be worthless, but no worse than that.
Delisting and Bankruptcy
When the stock of a major corporation drops below a certain price, it risks being delisted, meaning it would no longer trade on the New York Stock Exchange or Nasdaq. Delisting can make a stock more difficult to trade, trigger sales by certain institutional investors and result in a loss of confidence in the stock that can further erode stock price. When a company goes bankrupt, its stock will typically stop trading during bankruptcy proceedings. If after bankruptcy there is any value left for common shareholders, the stock will resume trading or shareholders will receive a cash distribution.
While one cannot owe money due to a stock price dipping below zero, it is possible for aggressive investors to owe money on a stock market portfolio. Margin borrowing, available at most brokerages, allows investors to borrow money to buy stock, using the purchased stock as collateral. For example, an investor with $15,000 may be able to buy $20,000 of stock by essentially taking a $5,000 loan from the brokerage. In that example, if the stock price dropped to zero, the investor would still owe the $5,000.
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