Should I buy stock in (insert name of bankrupt company), I think they're going to make a comeback?
From FinancialPlanning
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The stock is probably worthless
Even if a company in bankruptcy is going to make a comeback, it rarely makes sense to buy the stock. The reason is that the stock you'd be buying isn't the same stock that will be traded after the company exits bankruptcy. In most bankruptcies (meaning, reorganizations under Chapter 11 of the Bankruptcy Code), the original stock of the corporation is canceled, and new shares are created. The new shares are given to the creditors of the bankrupt company -- the companies and individuals who were owed money.
When trading in the stock resumes, the shares being traded are these "new" ones. The old ones are canceled, leaving a total loss for anyone owning them.
This isn't always obvious from reading the headlines. You'll see a company enter bankruptcy and exit it with the same name, perhaps even the same ticker symbol. But in almost all cases, it's really different stock and the original owners got nothing.
Why do these stocks continue to trade?
Why stocks in bankrupt companies continue to trade during bankruptcy is one of the Great Mysteries of the Investing Universe. Who is buying and selling? There are a few possible explanations for why trading continues:
- Because too many people don't know that the stock is probably worthless. Based on how often this question comes up, and how many people even consider buying stock in a bankrupt company, this may be the principal reason.
- Because occasionally a stock isn't canceled in bankruptcy, and even the slight chance of this happening is enough to create a market for the shares
- Because a lawsuit may entitle owners of the old stock to some compensation (very slim chance of this)
- Because each day there are at least some people who want to trade the stock -- if only to sell it to realize a capital loss on a specific date, or to cover a short sale.
How often do original shareholders get anything?
I'll update the list below as people send in any more examples of publicly traded companies where the original shareholders weren't wiped out after a bankruptcy. They've been few and far between:
1. PG&E
2. Owens-Corning
3. USG
4. is there a fourth...?
How do I avoid these dogs?
Watch for a "Q" tacked onto the end of the stock ticker, which indicates that the company has filed for bankruptcy.
