In the market, stocks have the potential to lose all of their value, and they have in the past, particularly in bankruptcy cases. In actuality, shareholders frequently receive some residual payment back even if a company does declare bankruptcy, but this is typically only pennies on the dollar. This information shouldn’t deter you from making stock or investment-related investments in general. But if we said that stocks have no risk—though some do, of course, carry more risk than others—we would be lying. Continue reading to learn how a stock’s price can plummet to almost nothing.
When you invest in the stock market, you’re essentially buying a piece of a company. The value of your investment is directly tied to the performance of the company. If the company does well, your investment will likely increase in value. However, if the company does poorly, your investment could lose value. In some cases, the company could even go bankrupt, which would mean that your investment would be worthless.
So, what happens if your stock goes negative? The answer is that it depends on how you’ve invested in the stock
If you’ve invested in a cash account:
- Your loss is limited to the amount you invested.
- Even if the stock price goes to $0, you will only lose the money you put in.
- You will not owe any money to anyone.
If you’ve invested in a margin account:
- You may owe money if the stock price falls below a certain level.
- This is because you’ve borrowed money from your broker to purchase the stock.
- If the stock price falls below a certain level, your broker will require you to repay the loan.
- If you cannot repay the loan, your broker may sell your shares to cover the loss.
Here is an example of how margin works:
- You purchase 100 shares of a stock for $10 per share, using a margin account.
- You borrow $500 from your broker to purchase the stock.
- The total cost of the stock is $1,000.
- The margin requirement is 50%.
- This means that you must have $500 in your account to cover the loan.
- If the stock price falls to $5 per share, your investment will be worth $500.
- You will still owe your broker $500.
- If the stock price falls below $5 per share, your broker may require you to repay the loan.
- If you cannot repay the loan, your broker may sell your shares to cover the loss.
Here are some additional things to keep in mind about negative stock prices:
- The lowest a stock price can go is $0 per share.
- Even if the value of the stock is negative, you would never have to pay someone to take the shares off your hands.
- This is because there is no cost to own stock with negative value.
- As a result, the price of the stock would simply go to $0.
Can You Owe Money on Stocks You’ve Invested In?
When you invest in stocks, you are essentially buying a small piece of a company. The value of your investment is directly tied to the performance of the company. If the company does well, your investment will likely increase in value. However, if the company does poorly, your investment could lose value. In some cases, the company could even go bankrupt, which would mean that your investment would be worthless.
So, can you owe money on stocks you’ve invested in? The answer is yes, but it is not as common as you might think. There are two main ways that you can owe money on stocks:
- Margin trading: Margin trading is a type of investing that allows you to borrow money from your broker to purchase stocks. This can amplify your gains, but it can also amplify your losses. If the stock price falls, you will still be responsible for repaying the loan to your broker. If you cannot repay the loan, your broker may sell your shares to cover the loss. This could leave you owing money to your broker.
- Short selling: Short selling is a type of investing that allows you to profit from a decline in the price of a stock. You borrow shares of a stock from your broker and sell them on the open market. If the stock price falls, you can buy the shares back at a lower price and return them to your broker. This allows you to keep the difference in price as profit. However, if the stock price rises, you will have to buy the shares back at a higher price, which could result in a loss. If you cannot cover the loss, you may owe money to your broker.
Here is an example of how margin trading works:
- You purchase 100 shares of a stock for $10 per share, using a margin account.
- You borrow $500 from your broker to purchase the stock.
- The total cost of the stock is $1,000.
- The margin requirement is 50%.
- This means that you must have $500 in your account to cover the loan.
- If the stock price falls to $5 per share, your investment will be worth $500.
- You will still owe your broker $500.
- If the stock price falls below $5 per share, your broker may require you to repay the loan.
- If you cannot repay the loan, your broker may sell your shares to cover the loss.
Here is an example of how short selling works:
- You borrow 100 shares of a stock from your broker and sell them on the open market for $10 per share.
- You receive $1,000 from the sale of the stock.
- If the stock price falls to $5 per share, you can buy the shares back for $500.
- You return the shares to your broker and keep the difference in price as profit ($500).
- However, if the stock price rises to $15 per share, you will have to buy the shares back for $1,500.
- You return the shares to your broker and lose $500.
Frequently Asked Questions
What happens if a stock goes to zero?
If a stock goes to zero, it means that the company has gone bankrupt. This means that the company is no longer in business and its assets have been liquidated. If you owned shares of the company, your investment would be worthless.
What is the difference between a cash account and a margin account?
A cash account is a type of brokerage account that allows you to buy and sell stocks with the money that you have deposited into the account. A margin account is a type of brokerage account that allows you to borrow money from your broker to purchase stocks. This can amplify your gains, but it can also amplify your losses.
What is short selling?
Short selling is a type of investing that allows you to profit from a decline in the price of a stock. You borrow shares of a stock from your broker and sell them on the open market. If the stock price falls, you can buy the shares back at a lower price and return them to your broker. This allows you to keep the difference in price as profit. However, if the stock price rises, you will have to buy the shares back at a higher price, which could result in a loss.
Impact on Long and Short Positions
For a long position, the consequences of a stock losing all of its value will differ from those of a short position. Naturally, a stockholder who holds a long position hopes that their investment will increase. A price decline to zero indicates that the investor forfeits his or her entire investment, with a return of 100%
On the other hand, the best case scenario for an investor holding a short position in the stock is a total loss in the stock’s value. Because the stock is worthless, the investor holding a short position does not need to buy back the shares and return them to the lender (typically a broker), meaning the short position gains a 10% return annually. Remember that it is generally not a good idea to partake in the sophisticated practice of short selling securities if you are unsure if a stock can lose all of its value. The downside risk of a short position is significantly higher than that of a long position, making short selling a speculative tactic.
To summarize, yes, a stock can lose its entire value. However, the decline to worthlessness can be advantageous (for short positions) or disadvantageous (for long positions) depending on the investor’s position.
Common shareholders frequently receive some form of residual compensation even in the event of a company’s bankruptcy, but it is typically very little. For instance, if a business files for Chapter 11 bankruptcy, a judge may decide to restructure the business so that it can resume operations after paying its creditors back. Should the business file for Chapter 7, both the business and your shares will be dissolved.
Can a Stock Go Negative?
In theory, a business with more liabilities than assets is worth less than its total debt. However, shares of its stock would not go negative; instead, they would simply fall to zero.