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.

  1. What are ComputerShare's escheatment services?

    Escheatment is the process by which ownership of abandoned property is transferred to the state. Escheated property can include ... Read Full Answer >>
  2. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>
  3. Does working capital include stock?

    A certain portion of a company’s working capital is generally composed of earnings; however, current short-term assets that ... Read Full Answer >>
  4. Does working capital include short-term debt?

    Short-term debt is considered part of a company's current liabilities and is included in the calculation of working capital. ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Related Articles
  1. Entrepreneurship

    10 Ways to Be a Successful Entrepreneur

    Are you hoping to launch your own business and work for yourself? If so, here are the top 10 tips for entrepreneurs.
  2. Markets

    Are EM Stocks Finally Emerging?

    Many investors are looking at emerging market (EM) stocks and wonder if it’s time to step back in, while others wonder if we’ll see further declines.
  3. Investing

    Understanding High Yield Fund Performance

    For exchange traded fund, not all high-yield ETFs are the same. So, we take a look at one high yield investment in particular to set the stage for you.
  4. Investing Basics

    Valuation Of A Preferred Stock

    To find the value of the preferred stock, each future dividend payment needs to be discounted back to the present, and then added together.
  5. Bonds & Fixed Income

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  6. Investing

    The Case for Preferred Stocks

    While some investors have turned to high yield bonds, preferred stocks have been mostly overlooked. So, it's now a good time to take a closer look at them.
  7. Mutual Funds & ETFs

    Top 6 Preferred Stock ETFs

    A list of top ETFs which invest in preferred stocks and pay regular dividend income
  8. Options & Futures

    Haunting Wall Street: The Halloween Terminology Of Investing

    Beware of zombies and Jekyll and Hyde companies! Read about the spooky terms circulating Wall Street.
  9. Entrepreneurship

    5 Biggest Challenges Facing Your Small Business

    Would-be business owners must consider the unique challenges that lie ahead when they start a small company. Following are five they are likely to face.
  10. Investing

    5 Iconic Airlines That No Longer Exist

    Learn the stories behind the disappearance of a number of formerly iconic airlines that no longer exist following financial difficulties or other problems.
  1. Interest Coverage Ratio

    A debt ratio and profitability ratio used to determine how easily ...
  2. Security

    A financial instrument that represents an ownership position ...
  3. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a ...

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center