Bankrupt stock
A bankrupt stock is a term used for the stocks of those companies that have been declared bankrupt. One of key features of bankrupt stock that attracts investors is the low price. Most of investors buying bankrupt stocks are long term perspective buyers. It has been seen that stocks of a company that has been declared bankrupt are available for few cents only while they were actually trading at levels of $45 or even more. Most of investors buy bankrupt stock due to their belief that company shall come out of bankrupt cy one day, would post good profits and stock price shall rise to previous levels once again. If such things happen, an investor would certainly make huge profits and it does happen in some cases.
Actual reality of bankrupt stock
Though huge profit margin can attract any investor towards bankrupt stocks, there are some bitter realities. As per the survey conducted, consisting of 154 bankrupt firms, it was found that only 60-63 firms were able to maintain their existence while rest wiped out of market. This is really a very dangerous situation as an investor can loose good percentage of money. Most of people lost 70% of the investment made in bankrupt stocks. There are many types of dangers associated with bankrupt firms that may hamper its progress. For example, final resolution, as provided by the bankrupt cy court, can be in favor of bankrupt firm or can be against it. Similarly, time taken for the bankrupt cy process to get completed can be enormous.
Investor may be forced to sell the bankrupt cy stock bought at lower prices due to many factors. It has been seen that on an average, it takes about two years in United States to get the bankrupt cy process completed, which indeed is a long period of time. Similarly, quality of reorganization plan can also affect the bankrupt stock investor. Even if a favorable reorganization plan is made, successful implementation is the next key concern. Thus, there are many dangers associated with making investment in bankrupt stocks. Also, as per the study done, it was revealed that high percentage of bankrupt firms fail to earn good profits when they are given second chance and thus, probability of making profits through bankrupt stocks also gets reduced. Many experts feel that unsophisticated investors should keep themselves aloof from making investment in the bankrupt stocks. However, superior financial skills, proper understanding of intricacies involved in operations pertaining to bankrupt firms, and proper understanding of legal aspects and consequences can help a person in making profitable decision regarding bankrupt stocks.
Some aspects
When a company makes a bankrupt cy announcement, its stocks react very sharply and there is a huge sell off all around. Thus, stock price goes down very quickly and in some trading sessions, bankrupt stock s are often reduced to cents. In most of cases, stock prices are reduced to $2 or even less at the time of filing of bankrupt cy and they continue to do so throughout the bankrupt cy procedure. Such stocks would definitely attract many investors due to such lower prices. The decline in the value of stock , now bankrupt stock , is due to the fact that there would be very less or no cash flows in future, the company would loose its reputation, its market capitalization would come down drastically, employees would either resign or are fired, etc.
Many people believe that if they buy shares of bankrupt company and keep them for a period of 5-7 years, they would make good gains by investing very less money, say buying 500 bankrupt stocks at $1 only. This belief, however, can incur loss as most experts feel that buying stocks of a company that goes bankrupt is worthless. A person can make some money by buying bonds, but not with common shares. bankrupt stocks have not been expressed as cheap stocks by the stock market experts.
When any company starts talking bankrupt cy, its shares at Wall Street goes down quickly and a panic is created among investors. There can be some smart investors who like to watch the blood bath and wait till it is over. List of bankrupt stocks is generally found in all the major financial newspapers. These are also called as Chapter 11 stocks some times. A symbol is also used by these newspapers to denote bankrupt stocks. If any person wishes to make investment, he should get the quarterly and annual reports of concerned company. It is better to pick bankrupt stocks of those companies that had sales in the range of $300 to $400 million. Similarly, bankrupt stocks of those companies that have very high debts to pay should not be considered even from long term perspective. Financial experts also feel that a person should stick with those companies that were listed at NYSE previously.
This is because listing requirements for NYSE are considered as one of most stringent and thus, only better performing companies are listed. Such companies, after going through bankrupt cy process, are considered to trade at better levels at smaller exchanges. One of best ways of selecting bankrupt stock is to select those companies that have been associated with popular brand names, as far as products and services are concerned. This is because even after bankrupt cy filing, such products and services continue to be sold and upon coming out of bankrupt cy, stocks are expected to make good profits. If there has been announcement of new management to take up the operation and management of bankrupt company, its good for an investor and thus, bankrupt stocks pertaining to those companies can be selected. Its no use to give previous, failed management to another chance. In some cases, trustee of the bankrupt company may ask the shareholders to send them back for getting same in the reorganized company, numbers and amount of which, can vary.
Other Articles
