What happens if I maintain a short position in a stock that is delisted and declares bankruptcy?

By Investopedia Staff AAA
A:

The short seller owes nada. Nil. Zip. Zero.



When you short sell you borrow the shares, sell them on the market, and then collect the proceeds as cash. If you wanted to get out of the position, you would have to buy back the same number of shares to repay the person (or brokerage) from whom you borrowed them. If you buy back the shares at a price lower than the price at which you originally sold them, you collect the difference - so short selling is a way to profit from a falling stock. But if the company is delisted and bankrupt, you don't have to pay back anyone because the shares are worthless.



Note: This is the best possible scenario for a short seller.



RELATED FAQS

  1. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ...
  2. What's the difference between a cash account and a margin account?

    Compare and contrast margin and cash accounts. Margin accounts offer short-term loans, leverage on existing portfolios, and ...
  3. What happens to a company's stocks and bonds when it declares chapter 11 bankruptcy ...

    Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that ...
  4. How long can you short sell for?

    When an investor or trader enters a short position, he or she does so with the intention of profiting from falling prices. ...
RELATED TERMS
  1. Estimated Recovery Value (ERV)

    The projected value of an asset that can be recovered in the ...
  2. Recovery Rate

    The extent to which principal and accrued interest on a debt ...
  3. David Einhorn

    Known for his short selling strategy, activist investor David ...
  4. Bankruptcy Court

    What is bankruptcy court?
  5. Short Call

    A type of strategy regarding a call option, which is a contract ...
  6. Reorganization

    A process designed to revive a financially troubled or bankrupt ...

You May Also Like

Related Articles
  1. Short selling -- selling borrowed stock in hopes the price goes down -- was unregulated until the Great Depression.
    Investing Basics

    Why Is Short Selling Legal? A Brief ...

  2. Steps to pick the right options brokerage account depending on your needs, style of trading, etc. It should be unbiased - This article is mainly for a trader who does not know how to pick a option brokerage account
    Options & Futures

    Pick the Right Brokerage Account for ...

  3. Struggling businesses don't always choose bankruptcy. They can try negotiating with creditors directly or liquidating assets outside the U.S courts.
    Entrepreneurship

    Alternatives To Business Bankruptcy

  4. What does bankruptcy means for an individual, how it will affect it in the future with personal finances and what are some way to mitigate its impact
    Credit & Loans

    Bankruptcy Consequences

  5. Economics

    What is Happening To Atlantic City's ...

Trading Center