A:

The answer to the first part of this question is pretty straightforward: yes, stocks are able to lose all their value in the market. Now, we don't want to scare you off investing in stocks, or investing in general. However, we would be lying if we told you that stocks carry no risk (although some carry more than others).

To help you understand why a stock can lose all its value, we should review how stock price is determined. Specifically, the value of a stock is determined by the basic relationship between supply and demand. If a lot of people want a stock (demand is high), then the price will rise. If a lot of people don't want a stock (demand is low), then the price will fall. (For a deeper look into supply and demand and other economic concepts, check out the Economics Basics Tutorial.)

If a stock's demand sinks dramatically, it will lose much (if not all) of its value. The main factor determining the demand for a stock is the quality of the company itself. If the company is fundamentally strong, that is, if it is generating positive income, its stock is less likely to lose value.

So, although stocks carry some risk, it would not be accurate to say that a loss in a stock's value is completely arbitrary. There are other factors that drive supply and demand amongst companies. (If you want to learn more, take a look at the Stock Basics Tutorial.)

The effects of a stock losing all its value will be different for a long position than for a short position. Someone holding a long position (owns the stock) is of course hoping the investment will appreciate. A drop in price to zero means the investor loses his or her entire investment - that's a return of -100%.

Conversely, a complete loss in a stock's value is the best possible scenario for an investor holding a short position in the stock. Because the stock is worthless, the investor holding a short position does not have to buy back the shares and return them to the lender (usually a broker), which means the short position gains a 100% return. Bear in mind that, if you are uncertain about whether or not a stock is able to lose all its value, it is probably not advisable to engage in the advanced practice of short selling securities. Before you decide to try short selling, remember the downside risk of a short position is much greater. (You can check out our Short Selling Tutorial to explore this concept further.)

To summarize, yes, a stock can lose its entire value. However, depending on the investor's position, the drop to worthlessness can be either good or bad.

RELATED FAQS
  1. How can you lose more money than you invest shorting a stock? If you have no money ...

    The simple answer to this question is that there is no limit to the amount of money you can lose in a short sale. This means ... Read Answer >>
  2. Where does the money I have invested in a company go when the stock price decreases?

    First, a quick review of stock basics: owning a stock means owning a portion (usually very small) of a company. Therefore, ... Read Answer >>
  3. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  4. Please explain what a short seller is on the hook for when he or she shorts a stock ...

    Short selling is hard enough to get your head around without getting into all the particulars. If you have a basic understanding ... Read Answer >>
  5. How can I use equity options to protect my stock portfolio from downturns?

    Learn about stock options, how to use them to hedge stock positions and how they could help to protect stock portfolios from ... Read Answer >>
  6. If an investor is short a dividend-paying stock on record date are they entitled ...

    Learn what short sellers must do when they are short a dividend-paying stock on record date. Read Answer >>
Related Articles
  1. Investing Basics

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  2. Active Trading Fundamentals

    Short Selling: What Is Short Selling?

    Investopedia Explains: The fundamentals of short selling and the difference between going long or short on an investment.
  3. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  4. Active Trading Fundamentals

    Five Minute Investing: Replacing Stock Market Myths

    In the introduction to "Five Minute Investing", I mentioned that the ideas and approaches developed in this book would be unorthodox. In this chapter, I hope to point out and correct a few of ...
  5. Active Trading

    Buy High, Sell Much Higher

    Value investing may seem fool-proof, but it carries more risk than you might know.
  6. Active Trading

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  7. Fundamental Analysis

    Value Investing Strategies in a Volatile Market

    Volatile markets are a scary time for uneducated investors, but value investors use volatile periods as an opportunity to buy stocks at a discount.
  8. Active Trading Fundamentals

    The Art Of Cutting Your Losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  9. Active Trading

    Value Investing: Finding Undervalued Stocks

    There are two basic steps to finding undervalued stocks: developing a rough list of stocks you want to investigate further because they meet your basic screening criteria, then doing a more in-depth ...
  10. Investing Basics

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
RELATED TERMS
  1. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  2. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  3. Stock Market

    The market in which shares of publicly held companies are issued ...
  4. Short Covering

    Buying back borrowed securities in order to close an open short ...
  5. Downside Risk

    An estimation of a security's potential to suffer a decline in ...
  6. Short Market Value

    The market value of securities sold short through an individual's ...
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center