There are numerous standards established by stock exchanges to control membership in the exchange. Companies wishing to issue their stock on an exchange must meet certain listing requirements and maintain them.

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.

What Are Some Listing Requirements?

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 (SEC), the exchange may choose to delist the company's stock.

For example, the New York Stock Exchange (NYSE) requires that a company must have at least 1.1 million publicly-traded shares outstanding that are worth at least $100 million to be listed.

What Happens to Delisted Stocks?

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 usually 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.

How Does This Affect Share Ownership?

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 carefully review the reasons for its removal and the potential impact it could have on you as an investor, because you may not want to continue holding the stock.