Do I Lose My Money If a Stock Is Delisted?

When a company’s stock is removed from a major stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, it is known as delisting. Delisting significantly alters how a stock can be traded and impacts its visibility within the financial markets. This article clarifies the process and consequences of stock delisting for shareholders.

Understanding Stock Delisting

Delisting can occur for various reasons, broadly categorized as either voluntary or involuntary. Voluntary delisting happens when a company chooses to remove its shares, often to go private, merge with another entity, or reduce the costs and regulatory burdens associated with being publicly traded. In such cases, the company may offer to buy back shares or exchange them for shares in a new entity.

Involuntary delisting is initiated by the exchange due to the company’s failure to meet continued listing requirements. These requirements include maintaining a minimum share price, such as $1.00 per share, over a specified period. Companies might also face delisting for not meeting minimum market capitalization thresholds, failing to submit timely financial reports, or violating corporate governance standards. Exchanges issue a non-compliance notice and provide a grace period, often 180 to 360 days, for the company to regain compliance before delisting procedures are finalized.

Life of a Stock After Delisting

Once a stock is delisted from a major exchange, it transitions to trading on over-the-counter (OTC) markets. These markets operate through a network of dealers rather than a centralized exchange. Common venues for delisted stocks include the OTC Bulletin Board or Pink Sheets, which have fewer stringent listing requirements. Shares of a delisted company still represent ownership in that company; they do not immediately become worthless.

However, the trading environment for delisted stocks is significantly different. Liquidity, the ease with which shares can be bought or sold without affecting their price, decreases substantially. This reduced liquidity can lead to wider bid-ask spreads, making it more challenging for shareholders to execute trades at desired prices. Price discovery becomes less transparent, and regulatory oversight and reporting requirements for companies on OTC markets are less rigorous than on major exchanges. This reduced transparency can make it difficult for investors to obtain current financial information about the company, impacting their ability to assess its true value.

Delisting and Company Bankruptcy

It is important to distinguish between stock delisting and company bankruptcy, as they are separate events with different implications for shareholders. While a delisting may signal a company’s financial distress, it does not automatically mean the company is bankrupt. However, bankruptcy, particularly liquidation under Chapter 7 of the U.S. Bankruptcy Code, can profoundly impact shareholders.

In a liquidation scenario, a trustee is appointed to sell the company’s assets, and proceeds are distributed to creditors according to a strict legal hierarchy. Secured creditors, such as banks holding collateral, are paid first. Unsecured creditors, including bondholders and suppliers, receive payments from any remaining assets. Common shareholders are at the very end of this payment queue, receiving little to nothing after all other obligations have been satisfied. While delisting itself does not eliminate share value, it can indicate financial difficulties that lead to bankruptcy, which is the primary cause of shareholders losing their entire investment.

What Shareholders Can Do

Shareholders whose stock has been delisted still retain ownership, and there are steps they can consider. The primary option for selling delisted shares is through the over-the-counter (OTC) markets. However, selling on these markets can be challenging due to significantly lower trading volumes and less accessible information, making it difficult to find buyers or achieve a favorable price. Some brokerage firms may also have restrictions on trading OTC stocks or may not support certain types of OTC securities.

Shareholders should monitor any announcements from the company regarding its status or future plans, as delisted companies may still issue press releases or file limited reports. Consulting with your brokerage firm is advisable to understand their procedures for handling delisted securities and to explore options for selling or transferring shares. If the shares become completely worthless, investors may claim a capital loss on their tax returns. The Internal Revenue Service (IRS) treats worthless securities as if they were sold on the last day of the tax year, allowing the loss to offset capital gains and, to a limited extent, ordinary income, up to $3,000 annually, with any excess losses carried forward to future years. To claim this deduction, the investor must demonstrate the security has become entirely worthless by filing IRS Form 8949 and Schedule D.