Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)

Can a stock lose its value?

The answer to this question, in theory at least, is a pretty straightforward: Yes.

Stocks are able to lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, in reality shareholders often do receive some residual payment back, but this is usually just pennies on the dollar. This fact should not scare you off from investing in stocks, or investing in general. However, we would be lying if we claimed that stocks carry no risk (although some, of course, carry more than others). Read on to see how a stock's price can get wrecked and approach zero.

Key Takeaways

  • Supply and demand determine the value of a stock in the market, with higher demand driving the price higher in turn.
  • Lower demand causes a stock to lose some value—and plummeting demand could cause it to lose all value.
  • Since a stock's price is meant to reflect its future profitability and growth, companies that go bankrupt can become effectively worthless.
  • This is often a calamity to those who are holding long positions and hoping a stock price will rise.
  • A massive drop in stock value can, however, be a boon to investors who are short the stock.

Determining Stock Price and Bankruptcy

To help you understand why a stock can lose all its value, we should review how the stock price is determined. Specifically, the value of a stock is determined by the basic relationship between supply and demand. If a lot of people want a stock (demand is high), then the price will rise. If a lot of people don't want a stock (demand is low), then the price will fall.

If a stock's demand sinks dramatically, it will lose much (if not all) of its value. The main factor determining the demand for a stock is the quality of the company itself. If the company is fundamentally strong, that is, if it is generating positive income, its stock is less likely to lose value.

So, although stocks carry some risk, it would not be accurate to say that a loss in a stock's value is completely arbitrary. There are other factors that drive supply and demand for companies. These have a lot to do with a company's fundamentals and growth outlook. As long as these are favorable and positive, a stock's price tends to rise. If, however, a company can no longer operate profitably, there is a chance that it will be forced out of business and declare bankruptcy.

When a company declares bankruptcy, it doesn't automatically mean that is absolutely worthless. The company can still hold assets that could be sold, brand recognition, and skilled employees. As a result, companies will often negotiate with their creditors to renegotiate their debts and restructure the company to emerge from bankruptcy. If the company is unable to achieve this, it may be forced to sell off its assets in a fire sale to repay creditors (such as banks, bondholders, and preferred stockholders). Only once these parties have been repaid can common stockholders receive any compensation based on what's left. If there is nothing left, the stock is worth zero.

Companies that are fundamentally strong are less likely to completely lose value than those that are on shakier legs, to begin with.

Impact on Long and Short Positions

The effects of a stock losing all its value will be different for a long position than for a short position. Someone holding a long position (owns the stock) is, of course, hoping the investment will appreciate. A drop in price to zero means the investor loses his or her entire investment: a return of -100%.

Conversely, a complete loss in a stock's value is the best possible scenario for an investor holding a short position in the stock. Because the stock is worthless, the investor holding a short position does not have to buy back the shares and return them to the lender (usually a broker), which means the short position gains a 100% return. Bear in mind thatif you are uncertain about whether a stock can lose all its value, it is probably not advisable to engage in the advanced practice of short selling securities. Short selling is a speculative strategy andthe downside risk of a short position is much greater than that of a long position.

To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good (short positions) or bad (long positions).

Even if a company goes bankrupt, common shareholders will often receive some sort of residual compensation, but only cents on the dollar. If a company files Chapter 11 bankruptcy, for example, a judge may restructure the firm, allowing it to continue operations after repaying creditors. If the company declares Chapter 7, the company is dead, and so are your shares.

Real-World Example of a Stock Losing All Its Value

Sometimes a company will be forced into bankruptcy and its stock fall to zero as the result of an accounting scandal or fraud. Take the famous case of Enron, a large and influential energy and trading company in the 1990s. By the early 2000s, the company was riding high and its stock was seeing all-time highs.

What people didn't know yet, however, was that Enron was using accounting tricks to hide massive losses and holdings of toxic assets. By 2001, analysts and investors began to question Enron's mark-to-market accounting practices and became suspicious of the company's earnings. In 2001, the company started to report massive quarterly losses, which quickly spiraled out of control.

At Enron’s peak, its shares were worth $90.75 in 2000; just prior to declaring bankruptcy on Dec. 2, 2001, they were trading at just $0.26.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (1)

Can a Stock Go Negative?

Technically, a company that has more debts and other liabilities than assets is worth a negative amount. Shares of its stock, however, would only fall to zero and would not turn negative.

What Happens If a Stock Price Goes to Zero?

If a stock's price falls all the way to zero, shareholders end up with worthless holdings. Once a stock falls below a certain threshold, stock exchanges will delist those shares. They may continue to tradeover-the-counter (OTC), and even bankrupt companies may see their shares trade for above zero for some time as speculators make wild bets on a miracle recovery.

Can You Lose All Your Money in Stocks?

Technically, yes. You can lose all your money in stocks or any other investment that has some degree of risk. However, this is rare. Even if you only hold one stock that does very poorly, you'll usually retain some residual value. The best way to ensure that you don't experience massive losses in stocks is to be well-diversified, research the holdings you invest in, and set thresholds to the downside whereby you will cut your losses and exit positions.

Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? (2024)


Can a Stock Lose All Its Value? How Does This Affect Long and Short Positions? ›

The effects of a stock losing all its value will be different for a long position

long position
Going long generally means buying shares in a company in anticipation that they will rise in value and can be sold later on at a profit. With options, a long position constitutes being the buyer in a trade. › ask › answers › whats-differe...
than for a short position. Someone holding a long position (owns the stock) is, of course, hoping the investment will appreciate. A drop in price to zero means the investor loses his or her entire investment: a return of -100%.

Can a stock lose all its value? ›

It's also true that some stocks will fall precipitously and lose all their value. That said, whether or not an investor experiences financial loss or gain in the case of a stock reaching zero depends on whether an investor is in a long- or short-term position.

How do short positions affect stock prices? ›

Potentially limitless losses: When you buy shares of stock (take a long position), your downside is limited to 100% of the money you invested. But when you short a stock, its price can keep rising. In theory, that means there's no upper limit to the amount you'd have to pay to replace the borrowed shares.

What happens if you short a stock and it goes down? ›

If the stock price falls, you'll close the short position by buying the amount of borrowed shares at the lower price, then return them to the brokerage. Keep in mind that to earn a profit, you'll need to consider the amount you'll pay in interest, commission and fees.

What is the difference between long and short stocks? ›

The distinction between going long and going short is brief but important: Being long a stock means that you own it and will profit if the stock rises. Being short a stock means that you have a negative position in the stock and will profit if the stock falls.

How does a stock lose value? ›

If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.

Can a stock lose more than 100%? ›

When you short a stock, you are hoping the stock's price will fall as far as possible. Because stocks never trade in negative numbers, the furthest a stock can possibly fall is to zero. This puts a limit on the maximum profit that can be achieved in a short sale.

How long can you hold a short position? ›

There's no specific time limit on how long you can hold a short position. In theory, you can keep a short position open as long as you continue to meet your margin requirements. However, in practice, your short position can only remain open as long as your broker doesn't call back the shares.

What is a long position and a short position? ›

Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value.

How does short selling hurt a stock? ›

Although short selling can improve market efficiency, critics point to several ways it may negatively impact markets and companies. Specifically, short selling may exacerbate stock declines, enable manipulative bear raids, and cause temporary artificial inflation in shares.

Who loses money when a stock is shorted? ›

Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.

What happens if I short a stock and it goes up? ›

If the stock that you sell short rises in price, the brokerage firm can implement a "margin call," which is a requirement for additional capital to maintain the required minimum investment. If you can't provide additional capital, the broker can close out the position, and you will incur a loss.

Who pays out when you short a stock? ›

Margin interest: Short selling can only be done through a margin account, and the short seller pays interest on the borrowed securities and funds. Stock-borrowing costs: The shares of some companies are difficult to borrow because of high short interest or limited share float, its availability for trading.

Does long mean buy or sell? ›

With stocks, a long position means an investor has bought and owns shares of stock. On the flip side of the same equation, an investor with a short position owes stock to another person but has not actually bought them yet.

How does shorting work for dummies? ›

Short selling is—in short—when you bet against a stock. You first borrow shares of stock from a lender, sell the borrowed stock, and then buy back the shares at a lower price assuming your speculation is correct. You then pocket the difference between the sale of the borrowed shares and the repurchase at a lower price.

Is it better to long or short a stock? ›

Going long vs.

Being long a stock means that you own it and will profit if the stock rises. Being short a stock means that you have a negative position in the stock and will profit if the stock falls.

Can a stock price go to zero? ›

If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.

What happens if your stock loses value? ›

A decrease in implicit value, for instance, leaves the owners of the stock with a loss in value because their asset is now worth less than its original price. Again, no one else necessarily receives the money; it simply vanishes due to investors' perceptions.

Can the stock market go to zero? ›

Have any stock markets gone to zero before? The answer is yes, although under extraordinary circ*mstances. Globally, only a few markets have suffered total market loss. The largest and most well known markets that went to zero are Russia in 1917 and China in 1949.

Do you owe money if your stocks go negative? ›

Always remember, you generally won't owe money if a stock goes negative, unless you're trading on margin.

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