A:

Occasionally, publicly listed companies go bankrupt. The company's shareholders, depending on the type of stock they hold, may be entitled to a portion of the liquidated assets, if there are any left over. However, the stock itself will become worthless, leaving shareholders unable to sell their defunct shares. Therefore, in the case of corporate bankruptcy, the only recourse is to hope that there is money left over from the firm's liquidated assets to pay the shareholders.

Upon bankruptcy, a firm will be required to sell all of its assets and pay off all debts. The usual order of debt repayment, in terms of the lender, will be the government, financial institutions, other creditors (i.e. suppliers and utility companies), bondholders, preferred shareholders and, finally, common shareholders. The common shareholders are last because they have a residual claim on the assets in the firm and are a tier below the preferred stock classification. Common shareholders often receive nothing at all, as there is usually very little left over once a firm has paid its debts.

The amount of the payment a common shareholder will receive is based on the proportion of ownership he or she has in the bankrupt firm. For example, suppose that a common stockholder owns 0.5% of the firm in question. If the firm has $100,000 to pay to its common shareholders post liquidation, this owner would receive a cash payment of $500.

If a shareholder owns preferred shares, he or she will have an increased chance of receiving a payment upon liquidation because this class of ownership has a higher claim on assets. (For further reading, see A Primer On Preferred Stocks and Knowing Your Rights As Shareholder.)

Investors should consider the possibility of bankruptcy when evaluating potential investments. Ratios, such as debt/equity and the book-value, can provide investors with a sense of what they may receive in the event of bankruptcy.

For more on this topic, read An Overview Of Corporate Bankruptcy.

RELATED FAQS
  1. What happens if I own a stock that is purchased by another company after filing for ...

    In declaring bankruptcy, a company is basically telling the market that it owes more money than it is worth. If the company ... Read Answer >>
  2. If a company files Chapter 11, will I lose my shares?

    The company is expecting to come out of chapter 11 by the end of the summer. What will happen to all my shares? ... Read Answer >>
  3. What are some characteristics of ordinary shares?

    Read about some of the primary characteristics of ordinary shares, also known as common shares, including voting rights and ... Read Answer >>
  4. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  5. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
  6. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares to both investors and issuing companies, including the ... Read Answer >>
Related Articles
  1. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  2. Investing

    What is the Shareholder Equity Ratio?

    The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
  3. Investing

    Who is a Shareholder?

    A shareholder is a person, company or other entity that owns at least one share of a company’s stock.
  4. Markets

    Knowing Your Rights As A Shareholder

    Common shareholders typically enjoy six main rights.
  5. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  6. Managing Wealth

    Don't Go Broke Buying Bankrupt Stocks

    Don't be tricked by bankrupt companies' low stock prices; they're low for a reason.
  7. Investing

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  8. Investing

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  9. Markets

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  10. Markets

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
RELATED TERMS
  1. Shareholder Equity Ratio

    A ratio used to help determine how much shareholders would receive ...
  2. Stock

    A type of security that signifies ownership in a corporation ...
  3. Shareholders' Agreement

    An arrangement among a company's shareholders describing how ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  5. Shareholder

    Any person, company or other institution that owns at least one ...
  6. Common Shareholder

    An individual, business or institution that holds common shares ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center