Can a Stock Go to Zero? An Investor’s Guide to Total Loss
Written by
Jacob Wade
Edited by
Melanie Grafil
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The stock market is an ecosystem of highs and lows, gains and losses. While many investors dream of their stocks soaring to great heights, sometimes, the stock you invest in loses money.
When a stock’s value plummets to zero, it’s because a company is in severe financial distress — typically bankruptcy — and the shares of stock are now worthless.
Here’s an overview of how a stock can go to zero, what causes it to happen, what happens after a stock drops to zero and steps you can take to protect your portfolio.
What Happens If a Stock Goes to Zero? 5 Key Consequences
If a stock goes to zero, there are a few things to keep watch over.
1. Delisting from Major Stock Exchanges
A stock that falls to zero is likely to be delisted from its stock, like the NYSE or NASDAQ, for failing to meet minimum requirements. This means it will no longer be traded on major exchanges, and the company becomes private, enters receivership or is dissolved.
Some stocks may still be available for trading over the counter (OTC), but will trade for pennies and for most investors, the stock is effectively no longer available to trade.
Your Investment Becomes Worthless
If a stock goes to zero, it essentially means the investment value has evaporated. Shareholders’ equity in the company becomes worthless, resulting in a total loss of the invested capital.
Using the Loss for Tax Purposes
For investors, losing an investment to a stock that has plummeted to zero can typically be used to offset capital gains taxes. You can claim the loss on your tax return to offset any capital gains from your taxable investment accounts, potentially lowering your tax bill for the year.
Company’s Fate
A stock hitting zero is often a precursor to the company filing for bankruptcy. In such cases, the company either restructures its debt and operations under bankruptcy protection or it liquidates its assets.
Creditors and Recovery
In the event of bankruptcy, creditors and bondholders are prioritized for repayment from any remaining assets. Common shareholders are last in line and often receive little to no compensation.
Case Study: The Collapse of Bed Bath & Beyond
Bed Bath and Beyond (BBBY) stock almost reached zero after having losses for several quarters. It got media attention after retail investors on sites like Robinhood started shorting the stock.
On April 11, 2023, MarketWatch reported the stock had fallen 98.5% in the last 12 months, closing at 29 cents that week. A few weeks later, a press release announced Bed Bath and Beyond would be delisted from NASDAQ, as the company was in the process of filing for Chapter 11 bankruptcy.
Shareholders that held BBBY after the company filed for Chapter 11 bankruptcy now own a stock that has no value. Any money invested in the stock is completely lost.
How To Protect Your Portfolio: 3 Essential Strategies
To safeguard against the risk of a stock dropping to zero, investors should do the following.
1. Diversify Your Investments
One effective strategy to cut risk is to spread your investment across different stocks and sectors, which can help protect your overall portfolio. For example, the travel industry might not experience a downturn at the same time as the tech industry.
Diversification across different types of assets can also help. Owning stocks, bonds, commodities and precious metals gives you a broader portfolio that can reduce volatility.
2. Conduct Thorough Due Diligence
It’s good practice to continuously monitor the financial health and performance of the companies you invest in, by regularly monitoring their progress and market trends. Some warning signs that a company may be at risk of its shares going to zero include:
- Consistent quarterly losses
- Rising debt levels
- Negative cash flow
- Senior executive departures
Follow news trends of companies you invest in to mitigate your risks.
3. Use Stop-Loss Orders
An additional precautionary measure is to set stop-loss orders, which can help limit potential losses by automatically selling a stock if it drops to a certain price level, protecting your investment.
Final Take: Protecting Your Wealth from Zero-Value Stocks
The scenario where a stock goes to zero is a stark reminder of the risks inherent in stock market investing.
Losing your entire stock investment might be an investor’s worst nightmare, but you can take steps to be prepared and protect yourself. Remember to your investments diverse, monitoring them and understanding the companies included in your investment portfolio.
FAQs on Stocks Going to Zero
Here are the answers to some of the most frequently asked questions about stocks going to zero.- What happens when a stock goes to zero?
- If a company's stock goes to zero, they are probably going bankrupt.
- Can a stock go negative?
- No. A stock cannot go below zero.
- Can you lose more money than you invest in stocks?
- Yes, if you borrow the money you invest through a margin account. If your investment loses value, you may have to pay the brokerage you lost money from.
- How can investors protect themselves from a stock going to zero?
- Stay up to date with the financial news of the companies you have invested in. Public companies must announce their earnings and losses each quarter.
- Are there warning signs that a stock is at risk of becoming worthless?
- Yes, most companies will have posted losses for several quarters. In rare cases, like the Silicon Valley Bank, the stock will drop quickly.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- IRS. "Topic no. 409, Capital Gains and Losses."
- FINRA. "What a Corporate Bankruptcy Means for Shareholders."
- MarketWatch. "Bed Bath & Beyond says shareholders are asking about naked short selling."
- PR Newswire. "Bed Bath & Beyond Inc. Receives Nasdaq Delisting Notice."
- U.S. Courts. "Chapter 11 - Bankruptcy Basics."
- FINRA. "Stock Investing and Due Diligence."
