What happens to the stock of a company that comes out of Chapter 11 bankruptcy? Do you lose all your shares of the company? -- H.A.
Don't be surprised if you see a company's securities continue to trade even after the company has filed for bankruptcy under Chapter 11. In most instances, even when a company is delisted from one of the major stock exchanges, its shares may continue to trade on either the over-the-counter bulletin board or the Pink Sheets. According to the
Securities and Exchange Commission
, there is no federal law that prohibits trading of securities of companies in bankruptcy.
There are many risks involved with buying stock of companies in bankruptcy protection. Most of the time, it's a guaranteed way to lose money.
In bankruptcies, bondholders and unsecured creditors are paid from the company's assets before common stockholders. Although a company may emerge from bankruptcy as a viable entity, the creditors and the bondholders generally become the new equity owners -- and their first order of business is to cancel the existing equity shares.
Explained: Trading a Stock in Bankruptcy >>
In those cases where existing shareholders do get to participate in the reorganization plan, their shares are usually subject to substantial dilution. So don't expect much on this score, either.
If the company does come out of bankruptcy, there may be two different types of common stock, with different ticker symbols, listed for the same company. One is the old common stock (the stock that was on the market when the company went kaput), which will trade on the Pink Sheets or over the counter with a five-letter symbol ending in "Q".
The second is the new common stock that the company issued as part of its reorganization plan. If you are betting on the company to rise from the ashes, this is the one you want, so make sure you place your order correctly.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.