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With all the coronavirus panic, I was wondering what would happen when the share price reaches £0 for a company, but the actual company itself or their business niche is not that much affected, i.e. the company is still operating and it's far from going bankrupt.

I'm not interested in answers that this is a good buy. I would like to understand what happens to existing share holders and the company itself, if shares for the company will hit £0. Is such an event possible?

This is for companies traded in the UK.

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    Company's share price is zero if and only if the company goes totally out of business. – mike3996 Mar 16 '20 at 10:34
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    Share price of 0 means the business is totally worthless. It's an effect, not a cause. If the share price is 0, then the company's value is 0. Imagine you owned Apple and I told you that I'll take Apple off you for free, but not for one cent. That's what 0 share price means. It means nobody would even buy the company for one cent. – user253751 Mar 16 '20 at 12:48
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    It might help if you understood what share price is. Share price is the price that the most recent seller accepted in a successful sale. Now is it clear why asking what happens when it reaches zero is nonsensical? – Eric Lippert Mar 16 '20 at 19:14
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    @EricLippert ‘Share price’ can mean many different things, depending on the exchange and market segment and on who's reporting it: it could be the price of the last trade, on or off the exchange or both, for buy or sell (depending on the aggressor side) or half-way between; the lowest sell and/or highest buy price in the limit order book and/or the quote book, or half-way between; the last open or close price (which may be set in many different ways); the last auction price; or all sorts of average/high/low/etc. values derived from them. – gidds Mar 17 '20 at 9:31
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    @user253751 : there can still be occasions when someone buys a company for 0, or for a symbolic 1 cent: the company is so deep in debt that the debt is bigger than how people evaluate its assets, but someone has a vision how to turn the company around (or use its intellectual property for something novel), so he buys it "for free" while also owning up its debt. – vsz Mar 17 '20 at 15:01
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Share price is determined simply by supply and demand. Changes in the share price typically don't directly affect the company's operations, though there are some ways that it could (e.g. when the price is lower, stock compensation must include more shares to make up the difference).

Practically speaking, the share price for an active company never reaches 0. There are always people willing to buy at a low enough price. Furthermore, the price reported for a stock is the last price at which the stock was sold. If demand for the stock were to fall to 0, there would simply be no liquidity (no shares of the stock bought or sold), but the share price would still be reported at whatever the last transaction price was. The effect on shareholders would be that they would not be able to sell their stock (because there's no demand). They'd have to hold it until someone is willing to buy it.

  • Isn't most stock compensation written in terms of number of shares? Like, we annually pay you $100,000 plus 10,000 shares, the idea being, if you help the company keep its share price high, you get a direct benefit...and if it falls, you feel the pain. Now, I had understood that companies may use their share reserves as collateral for loans, so if those reserves decline in value, the agreement with the lender may be in crisis. – CCTO Mar 16 '20 at 18:29
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    @CCTO Yes, stock compensation is usually a number of shares. But if you're hiring somebody new, or issuing refresher grants, or negotiating a change in pay, you'll need to offer more stocks to make the person happy if the stock price is lower. – Daniel Mar 16 '20 at 18:38
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    So lower stock price doesn't increase the number of shares you'll need to pay to people under current contracts, but increases the number of shares you'll need to pay to people under future contracts. – Daniel Mar 16 '20 at 18:39
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    Re "Changes in the share price typically don't directly affect the company's operations": Well, some companies change operations in order for the stock price to go up in the near term (even if it means it will go bankrupt in the middle or long term). – Peter Mortensen Mar 16 '20 at 19:45
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    Yes, you are all right that there are ways that the share price can affect certain aspects of the business (as I said in the answer), but in the typical case it doesn't make much of a difference. – Daniel Mar 16 '20 at 23:32
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There are two sides to every trade: a buyer and a seller. For the share price to be zero, the seller would be literally giving away their shares for free. It's hard to imagine any situation in which sellers would be motivated to do that. They might be prepared to sell cheap, but not for nothing.

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    What if it's actively bad to hold shares? – gerrit Mar 16 '20 at 19:51
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    @gerrit That could only happen if there was some fixed unavoidable cost (e.g. a strange form of taxation) in continuing to own a "worthless" share. Otherwise, the only way the price can move in future is upwards so there is no benefit in "giving the shares away." I remember a financial advisor once trying to bully me into some course of action by saying "but if there was a property price crash and your home was only worth $1,, what would you do?" He didn't like the answer "withdraw $1000 from my bank account, buy something 1000 times bigger than my house, and wait for the price recovery". – alephzero Mar 16 '20 at 20:11
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    @gerrit why would it be actively bad to hold shares? In standard company structures (e.g. excluding partnerships and such) in reasonable legal environments there are no possible downsides to holding shares, your liability is limited to what you paid for them, at worst they become effectively worthless. The legal framework for shares is usually carefully designed to ensure that it can't be actively bad to hold shares in order to facilitate public participation in share ownership and investment in the active economy; limited liability is a key concept from late 1800s facilitating modern economy. – Peteris Mar 17 '20 at 8:48
  • @Peteris I see. I thought that possibly, ownership may bring obligations, but apparently not. – gerrit Mar 17 '20 at 9:33
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    @gerrit it's worth noting that in the general case ownership may bring obligations, there are some legal forms of companies where that's true. However, such companies can't have their shares publicly traded; stock exchanges list only companies where owning their shares does not assume any liabilities. – Peteris Mar 17 '20 at 9:55
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Depends

For the London Stock Exchange, the price will not go to 0, because a listing requirement for Standard and Premium shares is a minimum market capitalization of £700,000. That is, the stock will be delisted well before the price drops to 0.

For the New York Stock Exchange, the minimum share price is $1, and the minimum capitalization is 1.1 million shares (among other requirements including number of shareholders, etc.). If a NYSE stock falls below $1 for more than 30 days, it will be subject to delisting. Most major stock markets have similar rules.

When a stock is delisted from the major markets, it may continue to trade via so-called Pink Sheets. In the US, these have a minimum price increment of $0.0001, but I cannot find any declaration of an actual minimum price. Given the argument by others that it would be irrational to give away shares for $0, I think it is safe to assume that no publicly traded shares will trade for less than a hundredth of a penny.

Of course, privately traded shares have much fewer restrictions, but again, it does not make logical sense to trade any shares for exactly $0.

Book Value

Note that minimally rational shareholders will never bid a share down to £0 anyway, if it is "still operating and it's far from going bankrupt", as you say. That's because the corporation has assets which can be sold off even in the event of liquidation. As an owner, a shareholder is thus going to value shares up to the portion of those assets to which they are entitled, which is called the book value. This valuation may be below the listing requirements for major exchanges, but again, that seems unlikely for an otherwise healthy corporation.

  • This is the right answer - trading will cease and/or it will get delisted before actually hitting zero. – pjc50 Mar 18 '20 at 11:26
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Let's play out your scenario.

Share price of (near) zero means BUY, BUY, BUY

Remember the golden rule.

I mean the other golden rule: Buy low, sell high. Very important not to mix those up.

It's important that you understand what "low" and "high" mean; that's relatively to the core value of the company. You specified a company with good core value.

Science has proven that a share price of zero qualifies as "low". Therefore, buy like a freak. Dig through your couch cushions for $0 coins. Short your rent check by $0 to buy more shares; your landlord will understand.

Best case scenario: you own the company. Use some of the company's actual assets to hire the best business consultants you can get. Have them tell you how to best "weather the storm".

Emerge from the other side of the crisis with a company with fantastic fundamentals.

Sell.

Why that won't work

If it made sense to do that, others much more attuned to the marketplace with much better research departments would have already done that, and this action would have either privatized the company or raised the stock price back to equilibrium.

Of course if the company is very small, and privately held, this absolutely can happen. Sometimes a small business owner lacks a key skill needed for the business to flourish, and gets sick of failing and says essentially "who will take this business off my hands?" I once could've had a very niche business for less than $100,000. It could've earned $250,000/year in competent management. The reason that didn't happen is the particular set of skills needed to make it work are scarce as hen's teeth.

Functionally negative stock price can actually happen. I've been an employee of a strong company that was ripe for acquisition by a major. However they had, for lack of a better word, toxic debt; a huge mortgage on a 5000-seat building on prime real estate the company had built just for it (they had shrunk to <200 employees). As long as they bore that mortgage, nobody wanted to acquire the company because they didn't need a new 5000-seat headquarters that was upside-down. As things were, they traded most of the company's cash to the builder to get out of the mortgage. Boom! They were acquired a week later.

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@timday's answer is correct that a zero share price means that a seller is giving away the shares for free. However, short sales create willing buyers which keep a stock price from dropping to zero, even in bankruptcy:

  • A short-seller is basically making a bet that the share price will go down.

  • Short-sellers borrow shares and sell them. At a later date (and hopefully at a lower price), they buy back the same number of shares, returning them to the party lending the shares, and keeping the profit.

  • A stock that is plummeting will attract short-sellers, willing to bet that the price will drop further. However, they are contractually obligated to buy shares again at a future date.

  • A rational seller will always demand at least some non-zero price. As long as there are short-sellers contractually obligated to buy shares, the sale goes through, and the stock price is nonzero.

A real-life example is the bankruptcy of the old General Motors. After Old GM filed for liquidation in 2009, the U.S. and Canadian governments, with several labor unions, funded a completely separate corporation, the New GM. Using the money from this funding, New GM purchased the good assets of old GM at auction (including the GM name itself, other intellectual property, factories, and inventory). This left Old GM with all the debts and liabilities (e.g. creditors, asbestos claims, product liability, environmental damage) and no assets to generate revenue.

Stockholders of General Motors prior to bankruptcy now owned shares in the worthless Old GM (officially called Motors Liquidation Company MTLQQ), and were given zero shares of New GM. Even the website of Old GM warned that the stock had no value:

Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company's secured and unsecured creditors are fully satisfied. In this case, management strongly believes all such claims will not be fully satisfied, leading to its conclusion that the common stock will have no value.

I had 1000 shares of old GM bought at $3, and expected them to be worthless because of the bankruptcy and the public admission quoted above. Nonetheless, I was able to sell them at $0.40 per share. Why? Because there were short-sellers who were contractually obligated to buy the stock, even if it was already worthless.

  • What obligates short sellers as to when they are required to buy the stock? Can't they just wait until the stock officially has no value? – Michael Mar 17 '20 at 22:16
  • @Michael: The contractual obligation is when to return the shares, not when to repurchase them. The short-seller is free to buy the shares back at any time before that date. However, if the short-seller thinks the price will go down further, they are likely to put off the repurchase until as late as possible. "The stock has no value" does not occur as long as the stock is being sold at a non-zero price. No rational seller would give the stock away for free, especially when they know there is a willing buyer. – DrSheldon Mar 17 '20 at 23:36
  • right, but what I'm saying is that at some point the shares will be worthless - if that date is after the date the seller is obligated to return them, why would the seller ever buy them back at a non-zero price? (is there even a penalty if one fails to return worthless shares?) – Michael Mar 17 '20 at 23:43
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    If the short-seller fails to return the shares, then they can be sued by the person from whom the shares were borrowed, for the value of those shares at the time they were borrowed. That wipes out the short-seller's profits. In contrast, if they buy back the stock at a low price, they have actually made a profit. The lower the price that they buy it back, the higher their profit. – DrSheldon Mar 18 '20 at 0:30
  • Also, the fact that the company would buy its shares back prevents the price from going to zero. The reason you emit shares in the first place is that you need more money than you can get otherwise. For that, you give up a little bit of your company's control and ownership, and you commit yourself to eventually pay dividends, etc etc. Which is, altogether, annoying, but you can't help it (otherwise nobody will give you money!). If you can get your shares back for zero (or almost zero) investment, then sure why not. You would be stupid if you didn't buy them back. – Damon Mar 19 '20 at 12:18
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It's hard to imagine such a situation. If the price of a single share drops below one cent, it will still not be zero as it would be possible to say it's worth, say, around half a cent if trades are usually around the mark of 2 shares for every cent in an order.

However, let's pretend it is zero. The most direct impact is that financing by equity from public markets is no longer possible as you could issue an infinite amount of shares and not receive a penny for it, potentially diluting all current shareholders. Conversely, you could buy back the entire company for free, assuming there are no liquidity costs.

  • Could buy back the company for free, assuming those that hold the remaining shares were willing to give away their shares for 0. Share price of "0" means the last transaction had price was 0. – Gregory Currie Mar 18 '20 at 15:35

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