A:

Let's start by walking through the reasons for listing requirements and what happens when a company's stock is delisted from a major exchange such as the Nasdaq.

The success of a stock exchange depends largely on investors' confidence in the stocks it trades on. So, to maintain investors' confidence, the major exchanges allow only public companies that meet specific requirements to list on the exchange. Just a few of these requirements are a minimum share price, number of shareholders and level of shareholders' equity. Should a stock fall below the minimum share price or fail to provide timely documentation of its performance and operations such as its 10-Q or 10-K filings with the Securities and Exchange Commission, the exchange may choose to delist the company's stock.

If one of your stocks is delisted, the company basically has two options. It can choose to trade on the Over the Counter Bulletin Board (OTCBB) or the pink sheets system. Usually, if the company is current with the release of its financial statements, it will trade on the OTCBB, as it is more regulated than the Pink Sheets (although both are much less regulated than the major exchanges). If the company is unable to trade on the OTCBB, it will likely end up trading on the Pink Sheets - the least regulated market for a publicly-traded equity.

When a stock drops down to either the OTCBB or the Pink Sheets, it suffers a loss in investors' confidence, as the company failed to meet the requirements of the trusted major exchanges. If the company remains delisted beyond a short period of time, institutional investors will likely stop researching and trading the stock, which means individual investors have access to much less information about the company. Liquidity and trading volume drop off as a result.

Now, throughout this entire process, you still legally own your shares in the company (should you choose not to sell them). However, delisting is generally regarded as the first step toward potential Chapter 11 bankruptcy. Should one of your stocks be delisted from a major exchange, it would be prudent to review carefully the reasons for its removal and the impact it will have on you as an investor - as you may not want to continue holding the stock.

For more detail, see The Dirt On Delisting.

RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
Related Articles
  1. Home & Auto

    When Getting a Rent-to-Own Car Makes Sense

    If your credit is bad, rent-to-own may be a better way to purchase a car than taking out a subprime loan – or it may not be. Get out your calculator.
  2. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  3. Investing

    Looking To Begin Trading In The Stock Market?

    If you are a new trader, we explain the differences between penny stocks and options so you can make the best decision for your personal trade plan.
  4. Investing News

    Will Arch Coal file for Bankruptcy?

    In the last four years, Arch Coal Inc. (ACI) has been facing headwinds from lower price of coal amid global oversupply. The shares of ACI have lost nearly 99% of their value this year.
  5. Options & Futures

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  6. Investing Basics

    How Does a Collar Work?

    Collar refers to a protective options strategy that investors use after a stock has experienced substantial gains.
  7. Options & Futures

    Long on Oil? Hedge Falling Oil Prices with Options

    With no end to the oil slump in sight, here are some risk management strategies using options to protect your oil positions.
  8. Investing Basics

    3 Companies You Never Thought Would Go Bankrupt

    Understand more about company bankruptcy and why a company would file for bankruptcy. Learn about three companies that went from industry leaders to bankruptcy.
  9. Investing Basics

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  10. Investing Basics

    Understanding the CBOE Volatility Index

    The VIX shows the market’s volatility expectations for the next 30 days.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Security

    A financial instrument that represents an ownership position ...
  3. Series 6

    A securities license entitling the holder to register as a limited ...
  4. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  5. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  6. Strike Width

    The difference between the strike price of an option and the ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!