12

Say you own 1% of company ABC's shares. If all of a sudden there is no more demand in the stock market for company ABC's stocks, and its share price dropped down to $0, can you claim 1% of company ABC's assets? Or would the only way to recover your losses be to sell your shares back to the company (I assume at whatever price the company chooses).

  • 9
    If the stock would really drop to $0, it would mean you could buy the remaining 99% of stock for $0. But obviously, so could everyone else. And it dropped to $0 because nobody thought it should be $0.01. So, 1% of what assets? And how about the liabilities? – MSalters Sep 16 '13 at 8:03
25

No.

You're entitled to 1% of votes at the shareholders' meeting (unless there's class division between shareholders, that is). If more than 50% of the shareholders vote to close the company, sell off its assets and distribute the proceeds to the owners - you'll get 1% share of the distributions.

  • 1
    So would I be correct, more often than not, in saying that the main motivation in owning stock is not actually to obtain equity in the company, but simply to hope that the value of that equity increases? In which case, we might as well be trading baseball cards. It seems like it doesn't matter what it is exactly that we're trading, just as long as we hope the value goes up. – elin05 Sep 16 '13 at 18:05
  • 2
    @elin05 people are collecting trading cards, cars, coins, stamps, art, guns, whatsnot. Some in hopes of appreciation, others just because they like it. Investing in stocks is similar, except that you can have some reasonable expectation of appreciation. Companies (usually) produce value, and as such appreciate. When a company like Google or Apple sits on a sack of cash of $100BB, it is highly unlikely that its stock price will be $0. You can also expect dividends (some invest only in companies that distribute dividends). – littleadv Sep 16 '13 at 18:12
  • Now I would like to question why stocks have this reasonable expectation of appreciation. Why would good company performance increase the value of the equity you hold in that company? Does one think, "now if the company goes under, the 1% of proceed distributions that I should be entitled to will be worth even more"? It just seems like stocks have their value simply because we believe it does. Is this why people say playing the stock market is a gamble? Because it is essentially gambling on people's faith in the market itself. The stock market seems like one big self-fulfilling prophecy. – elin05 Sep 16 '13 at 18:59
  • And speaking of dividends...I read that share prices will artificially drop by the dividend amount after the ex-div date in order to prevent people from simply buying stock before the ex-div and selling right after. Well in this case, wouldn't shareholders gain zero profit, since the drop in share price counters the dividend payment? If so, where's the appeal of dividends? By the way, thanks for the answers, @littleadv! – elin05 Sep 16 '13 at 19:01
  • 3
    Nobody invests in expectation of companies to go under. Company increases value by growing revenue and profits, accumulating assets, and reducing liabilities. There's not much sense to sell a stock of a company if its market valuation is under the value of its net assets (unless you have a reasonable expectation for the company to fail), and you know what that value is from the quarterly reports. Dividends - the profits/losses that you're talking are on paper only, while the dividend itself is real money in the pocket. – littleadv Sep 16 '13 at 19:05
18

No.

If the share price drops to $0, it's likely that the company is in bankruptcy. Usually, debt holders (especially holders of senior debt) are paid first, and you're entitled to whatever the bankruptcy proceedings decide to give holders of equity after the debt holders are paid off. More often than not, equity holders probably won't get much.


To give an example, corporate bankruptcy usually involves one of two options: liquidation or reorganization. In the US, these are called Chapter 7 and Chapter 11 bankruptcy, respectively. Canada and the United Kingdom also have similar procedures for corporations, although in the UK, reorganization is often referred to as administration. Many countries have similar procedures in place. I'll use the US as an example because it's what I'm most familiar with.

In Chapter 7 bankruptcy, the company is liquidated to pay its debts. Investopedia's article about bankruptcy states:

During Chapter 7 bankruptcy, investors are considered especially low on the ladder. Usually, the stock of a company undergoing Chapter 7 proceedings is usually worthless, and investors lose the money they invested. If you hold a bond, you might receive a fraction of its face value. What you receive depends on the amount of assets available for distribution and where your investment ranks on the priority list on the first page.

In Chapter 11 bankruptcy, the company is turned over to a trustee that guides it through a reorganization. The Investopedia article quotes the SEC to describe what happens to stockholders when this happens:

"During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company."

The exact details will depend on the reorganization plan that's worked out, local laws, court agreements, etc.. For example, in the case of General Motor's bankruptcy, stockholders in the company before reorganization were left with worthless shares and were not granted shares in the new company.

13

If you own 1% of a company, you are technically entitled to 1% of the current value and future profits of that company. However, you cannot, as you seem to imply, just decide at some point to take your ball and go home. You cannot call up the company and ask for 1% of their assets to be liquidated and given to you in cash.

What the 1% stake in the company actually entitles you to is:

  • 1% of total shareholder voting rights. Your "aye" or "nay" carries the weight of 1% of the total shareholder voting block. Doesn't sound like much, but when the average little guy has on the order of ten-millionths of a percentage point ownership of any big corporation, your one vote carries more weight than those of millions of single-share investors.

  • 1% of future dividend payments made to shareholders. For every dollar the corporation makes in profits, and doesn't retain for future growth, you get a penny. Again, doesn't sound like much, but consider that the Simon property group, ranked #497 on the Fortune 500 list of the world's biggest companies by revenue, made $1.4 billion in profits last year. 1% of that, if the company divvied it all up, is $14 million. If you bought your 1% stake in March of 2009, you would have paid a paltry $83 million, and be earning roughly 16% on your initial investment annually just in dividends (to say nothing of the roughly 450% increase in stock price since that time, making the value of your holdings roughly $460 million; that does reduce your actual dividend yield to about 3% of holdings value).

If this doesn't sound appealing, and you want out, you would sell your 1% stake. The price you would get for this total stake may or may not be 1% of the company's book value. This is for many reasons:

  • 1% doesn't sound like a lot, but it really is. Apple currently has the largest market capitalization of any corporation, at $419 billion (this represents total value of all stocks available for purchase; not all of the total value is publicly held). 1% of $419 billion, representing your hypothetical stake, is $4.19 billion. If you were to cash out and get that price, you'd be richer than Oprah Winfrey or George Lucas (still not cracking the top 10 wealthiest people list though).
  • Dumping that much stock on the market in one lump will cause demand, and thus price, to drop. Given current market cap and current bid prices, there are approximately 908 million shares of Apple stock on the market. Your 1% would be in the neighborhood of nine million shares. That's in the neighborhood of the total number of shares of Apple stock that change hands daily. Doubling that trading volume would, all things being equal, halve the price of the stock in short order, because now there's twice as many shares available as the market typically wants to buy or sell that day. The stock would recover as volume and scarcity returned to normal, but you would effectively have given up half of the stocks' value in the sale, which would be recouped by other investors. Generally, such a "divestment" from such a strong ownership position like this is made over a period of weeks or even months, a little at a time, and even then this steady drip can lower the purchase price over the time frame of your sale.
  • Book value is virtually never market value. Apple's market cap, again, is $419 billion. Current assets are in the $176 billion range. Current equity (money owed to investors and retained for itself), about $120b. So if you called up Apple and asked for 1% of their current assets in return for your 1% of their stock, they'd be happy to oblige; they'll give you $1.7b cash, you give them securities worth $4b, and unless they resell the stock to recoup their capital loss, 1% of their roughly $41b net profits (that's $410 million) is de facto retained earnings, as the stock is held by the corporation itself and so would effectively pay itself this dividend.

Now, to answer your hypothetical:

If Apple's stock, tomorrow, went from $420b market cap to zero, that would mean that the market unanimously thought, when they woke up tomorrow morning, that the company was all of a sudden absolutely worthless. In order to have this unanimous consent, the market must be thoroughly convinced, by looking at SEC filings of assets, liabilities and profits, listening to executive statements, etc that an investor wouldn't see even one penny returned of any cash investment made in this company's stock. That's impossible; the price of a share is based on what someone will pay to have it (or accept to be rid of it). Nobody ever just gives stock away for free on the trading floor, so even if they're selling 10 shares for a penny, they're selling it, and so the stock has a value ($0.001/share).

We can say, however, that a fall to "effectively zero" is possible, because they've happened. Enron, for instance, lost half its share value in just one week in mid-October as the scope of the accounting scandal started becoming evident. That was just the steepest part of an 18-month fall from $90/share in August '00, to just $0.12/share as of its bankruptcy filing in Dec '01; a 99.87% loss of value.

Now, this is an extreme example, but it illustrates what would be necessary to get a stock to go all the way to zero (if indeed it ever really could). Enron's stock wasn't delisted until a month and a half after Enron's bankruptcy filing, it was done based on NYSE listing rules (the stock had been trading at less than a dollar for 30 days), and was still traded "over the counter" on the Pink Sheets after that point. Enron didn't divest all its assets until 2006, and the company still exists (though its mission is now to sue other companies that had a hand in the fraud, get the money and turn it around to Enron creditors). I don't know when it stopped becoming a publicly-traded company (if indeed it ever did), but as I said, there is always someone willing to buy a bunch of really cheap shares to try and game the market (buying shares reduces the number available for sale, reducing supply, increasing price, making the investor a lot of money assuming he can offload them quickly enough).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.