What Happens to Your Shares When a Stock Is Delisted From an Exchange?

If you just found out that a stock you’ve invested in has been delisted, you’re probably worried.

Delisting is generally seen as a bad sign by investors, indicating that the company could be near bankruptcy or can’t meet the minimum financial requirements of the exchange. However, it’s not always a negative signal if the stock is voluntarily delisted by the company, such as in the case of going private or being acquired by another firm.

What Does Delisting Mean?

Delisting is when a listed security, like a stock, gets removed from an exchange. To be listed on a stock exchange like the Nasdaq or New York Stock Exchange, companies must follow certain rules and requirements.

If they break those rules, or decide to voluntarily remove themselves from the exchange, the stock is delisted. As a result, the stock becomes much harder for investors to purchase.

What Causes a Stock To Be Delisted?

A stock can be delisted in two ways: voluntarily or involuntarily. A company may voluntarily delist its stock from an exchange if it believes that it’s in the organization’s best interest to do so, whereas an involuntary delisting means that the company failed to meet the exchange’s minimum requirements.

Voluntary Delisting

Even if a company doesn’t break any rules and is in good financial health, it can voluntarily remove itself from a public exchange. After doing so, it may continue to trade its stock in the over-the-counter markets.

There are a few scenarios in which a voluntary delisting could make financial sense for a company:

• The company wants to reduce its costs. Some companies may decide that the costs of being publicly listed outweigh the benefits.
• The company is being bought out. When a private equity firm or some other company initiates a buyout, it usually buys most or all of the purchased company’s stock.
• The company is merging with another organization. If two listed companies merge, they may voluntarily request that their stocks be delisted so that they can trade as a new entity.
• The company wants to make faster decisions. Delisting often means that there’s less input from shareholders. This can be advantageous for a more agile approach to decision-making.

In such cases, shareholders of the delisted stock may receive compensation or shares in a new entity, so a voluntary delisting is not necessarily indicative of poor financial health.

Involuntary Delisting

The more common scenario occurs when a stock is forcibly removed from an exchange, because the company failed to meet the basic requirements. Each exchange can set its own listing requirements relating to stock price, trading volume, market capitalization and more.

There are many potential causes for an involuntary delisting, such as:

• The company failed to maintain a minimum share price. For example, both the Nasdaq and the NYSE have a minimum listing price of $4 per share.
• The company isn’t big enough. Not all companies can be listed on a stock exchange. They must have a certain volume of publicly traded shares worth a certain amount of money. For example, the NYSE requires listed companies to have at least 400 shareholders holding 1.1 million or more publicly traded shares worth at least $100 million in market value.
• The company failed to comply with regulations. If a company doesn’t file its financial reports on time or follow regulations related to corporate governance, it risks being delisted from public stock exchanges like the NYSE.
• The company is going bankrupt. When a company declares bankruptcy, it may still continue to trade its stock. However, most companies that file for bankruptcy are unable to meet the listing standards, resulting in delisting.

How Are Your Shares Affected When a Stock Is Delisted?

If the stock is delisted voluntarily, such as in the case of a merger or acquisition, then shareholders may be bought out or receive shares in a new company.

Delisted stocks can be traded over the counter. There are several disadvantages to trading OTC, including:

• Lower trading volume due to less accessibility and lower liquidity
• Fewer regulations than on major exchanges
• Higher transaction costs and wider bid-ask spreads.

In short, it’s usually undesirable to sell stocks after they’ve already been involuntarily delisted. If there are signs that a company is in financial trouble and is at risk for an involuntary delisting, it would likely be advantageous to sell the shares before that happens.