The dark side of a company bankruptcy

Nowadays, in the full unstableness of the market and the economy as a whole, some companies declare bankruptcy, and those are good examples of what is going to happen with your stocks, in a case of any company declaring bankruptcy.

Companies like JCPenney and Hertz and are declaring bankruptcy and you wouldn’t believe what happened to the shares price… It skyrockets instead of crashing down. So, in case of not aware of what usually happens when a company declares bankruptcy, there it is...

There are two options for a company to declare bankruptcy – using Chapter 7 or Chapter 11. If a company declares Ch.11 bankruptcy, what basically happens is – the company is asking for a chance to reorganize and recover. It asks protection from the court from the creditors. If the company survives, your shares may also survive too. But there is a very small chance of that happening. The company may cancel existing shares, making yours worthless. This is what happens in most of the cases. If the company declares bankruptcy under Ch.7, the company acknowledges the inability to function anymore. Rarely, any shareholders get something, as the creditors of the company are served first.

So essentially when a company announces bankruptcy the shares have zero value or close. You might be thinking – what if the company survives bankruptcy in the future and manage to cut costs and reorganize and survive somehow? You might think that the value of the shares will rise significantly. But, in reality, it turns out that the shares are almost always deleted during bankruptcy. The existing shares are just completely wiped out, most of the time. And if the company does survive the business owners, who credited the company in the past just create new shares for themselves. The new shares are not shared with the old shareholders.

A good example of the dark side of a company bankruptcy is the case with United Airlines. They went bankrupt in 2002. And four years later in 2006, the company managed to stabilize, and new shares went public. The same shares are still trading today but none of these new shares were given to the old shareholders. The people who held shares before and during bankruptcy lost everything. For them, it doesn't matter that the company survived.

So, nowadays, as an investor - you buy shares in Hertz, hoping for the company to survive, keep in mind that it probably won’t even matter as if the company does really survive, the business owners will most probably simply issue new shares and none of those will be shared with the old shareholders.

The stock exchange usually delists such shares and tries to stop them from trading. But some companies are fighting the delisting, as they would like to squeeze the most out of the market and the naïve investors.

The bottom line is that owners of common stock often get nothing when a company enters bankruptcy. Those shareholders are usually the last in line for compensation.

I would like to buy and sell shares online

The article will cover some of the rules for buying and selling shares online.
* The first thing you need is a bank account and also in Internet access on your computer.
* The set-up with most of the traders is free.
* There is usually a small fee for every trade/transaction (about £1-3).
* The trading itself is easy and intuitive. You will be offered a price for the shares requested and have a couple of seconds (10-30) to decide if you would like to complete the trade or not.
* The actual payment transaction is done a couple of days later (depending on your account settings).
* With some traders there are rules of how many times you could reject the offer so you don’t constantly bother them just to check the shares price.
* Some traders also have minimum trade quantity – so you have to buy a minimum of 100 shares for example.
* If you have an account with most of the major banks – you should be able to set up an online trading account with them.
* Do not expect to earn tons of money quickly – it really takes time (and some luck) to be a successful shares trader.
* Keep in mind that you could always lose your money (or at least part of it) – so do not invest money you cannot afford to lose.
* There is always a chance. Nevertheless - you should read analysis and have a strategy for every company you are investing in (to minimize the impact of having bad luck).