Can Stocks Go Negative?

Stocks cannot go negative for several reasons. While it is true that a company's liabilities can exceed its assets, leading to negative equity, the price of its shares can only drop to zero, not below. If a company's situation deteriorates to the point where its shares are worthless, that means shareholders lose their investments, but they do not owe money to the company or its creditors.

When you purchase stocks, you become a partial owner of the company; this ownership does not create a debt obligation to cover liabilities. In other words, shareholders have limited liability. If the company goes bankrupt and its assets are insufficient to satisfy its debts, shareholders simply lose their investment; they are not held responsible for the company's obligations. Thus, while a company may experience financial distress, the concept of negative stock prices is a misunderstanding.

Ultimately, stocks can only decline in value until they reach zero, at which point they simply become worthless—there's no negative territory for shareholders.

Who Maintains Stock Prices?

Stock prices aren’t maintained by a government body or financial council. The price of each individual stock is controlled by the millions of investors who buy and sell securities on public exchanges. Share prices rise when buyers outnumber sellers and the increased demand pushes up the cost investors are willing to pay. On the flip side, share prices decline when more sellers are present than buyers and unloading the stock becomes difficult.

Brokers like TD Ameritrade and Robinhood (NASDAQ: HOOD) facilitate stock trading by matching these buyers and sellers at a price acceptable to both parties. The buyer of the stock will always pay a little more than the seller receives — this difference is the spread paid to the broker. But share prices are affected by investors, whether large institutions, governments or individuals. Multiple parties working toward different goals cause the constant fluctuation of stock prices.

Can a Stock Be Delisted?

Trading on a public exchange like the Nasdaq or NYSE requires companies to maintain certain standards and practices. For example, to be listed on the NYSE, a company must have more than 1.1 million shares in circulation with a minimum market cap of $400 million (which puts the minimum share price around $4). The Nasdaq requires 1.25 million shares outstanding with a minimum share price of $1.

In addition to other regulatory and security requirements, shares must maintain these minimums in order to remain listed on the public exchange. Stocks are delisted frequently from major exchanges because their share price drops below the required minimum. Of course, shares aren’t just dropped from exchanges without notice. In most situations, the NYSE or other major exchange will issue a warning saying that a stock whose share price has fallen under the minimum has 30 days to reclaim that level or be delisted. At this stage, many companies choose a reverse stock split (combining outstanding shares in order to raise the stock price) in order to maintain the price minimum.

If the stock fails to reclaim the minimum price level after the 30-day period, it will be delisted from the exchange. Delisting doesn’t mean the stock goes to 0 or the company goes bankrupt. But removal from the major exchanges means that the company must now trade “over the counter” (OTC). OTC stocks are often troubled companies with accounting concerns — after all, no one wants to trade on the OTC exchanges. While some stocks like the Chinese firm Tencent (OTCBB: TCEHY) do just fine trading off the major exchanges, the goal of most publicly-traded firms is to be listed on the NYSE, Nasdaq, and the like.

Can a Stock Go Negative?

Investors often question the limits of stock market performance. This raises the question: Can a stock go negative? Stock prices are based on supply and demand. They usually reflect the value of a company. The idea of a negative stock price seems paradoxical. Stocks represent ownership in a company, so their value is linked to the firm's performance and market perception. However, bankruptcy and extreme market situations add complexity. In this discussion, we will examine whether stocks can "go negative" practically. We will also look at the circumstances that could lead to this and the broader impact on investors and the market. Understanding these factors is important for effective investment strategies and risk management.

Negative Stock Values: Myth or Reality?

Investors often wonder if stocks can have negative prices. However, in finance, stock prices cannot drop below zero. Companies in severe financial trouble might show negative shareholder equity. This means their liabilities exceed their assets. It indicates the company owes more than it owns. This situation can lower the stock's market value. The stock can only reach zero, not go negative. A negative net equity position raises concerns about the company's health. It affects how investors see the company's value and its chances of survival. When stocks get close to zero, it often signals bankruptcy or financial collapse. Such stocks are usually removed from major exchanges as investors pull out.

What Happens When Stock Prices Hit Zero?

When a stock price drops to zero, it means the company can no longer operate. This often leads to bankruptcy filings. In such cases, the company may reorganize or liquidate its assets. Shareholders are last in line to be paid. If liquidation occurs, they usually lose their entire investment. A zero stock price also means the shares cannot be traded in public markets, often leading to delisting from major stock exchanges. However, creditors and bondholders might recover some of their investment through asset liquidation, depending on the bankruptcy outcome.

Implications of Negative Stock Prices for Investors

Stock prices cannot go negative. However, negative equity can be a warning sign for investors. When a company’s liabilities exceed its assets, it can indicate trouble. For shareholders, this means the company might struggle to make profits. The stock price could drop and potentially reach zero, resulting in total loss for investors. Short-sellers see falling stocks as an opportunity to profit. For new investors, a company with negative equity poses high risk. Investing in such stocks is only wise for those who can handle volatility and potential loss. A stock nearing zero is a red flag, and investors should weigh the risk of complete loss carefully.

Can Share Prices Go Negative?

Here are a few caveats to the declaration that stocks can only fall to 0, but no further. An investor cannot lose more than their original investment provided they purchased stocks with non-borrowed money and aren’t using derivatives like options or futures contracts. As we saw in the example above, the May 2020 WTI futures contract did go negative, so not all investment instruments have a floor of 0.

Stock prices cannot fall below 0, but the expected value of a company can be negative and an investor’s account balance can fall into the red as well. Here are examples of both:

Stock Price vs. Enterprise Value

If a publicly-traded company has more liabilities (i.e., debt) than cash and assets, the price of its shares won’t be negative, but the value of the company (known as enterprise value) can certainly be negative. A negative enterprise value could put downward pressure on its stock price and eventually result in bankruptcy, but investors will never lose more than their original investment. However, company executives may owe more than the value of their shares to creditors should the enterprise face solvency concerns.

Derivatives and Leverage

A buy-and-hold investor will never lose more than their principal in stocks, but many investors and traders use instruments like derivatives or apply leverage to increase profits. Option writers can lose more than the premium they receive for selling the option if the stock makes a strong move in the other direction. This potential scenario is why options permission must be granted at most brokers and level of experience is taken into account. 

Additionally, an investor who trades on margin (i.e., borrowed money) can lose more than their principal if the stocks they buy decline and the broker issues a margin call. For example, if a trader buys $2,000 worth of stock with their own cash and another $2,000 on margin, any decline of more than 50% will result in a loss exceeding the original $2,000. Shorting also works in the same manner since shares are borrowed from the broker. If shares are shorted at $10 per share and the stock rises to $25, the short seller must rebuy the shares for more than they originally paid to borrow them.

Investors have never seen a better time to open a brokerage account. With most commissions sitting at 0 and partial shares available at many brokers, a diversified portfolio can be constructed cheaply and efficiently. Here is a list of Benzinga’s favorite online brokers for stock traders.

Unless Leverage is Applied, Investors Cannot Lose More Than Their Principal

Stock prices can fluctuate rapidly, and non-diversified investors run the risk of losing all the capital should their stocks run into liquidity or legal issues. And if you’re shorting, levering up or using derivatives, you can definitely lose more than your principal if you aren’t carefully constructing your trades.

But buy-and-hold investors have little to fear when it comes to owing money on stocks. If you buy 100 shares of stock and sit on them, you cannot lose more than your original investment, even if the company goes bankrupt and share prices crash to 0. That’s one of the benefits of a simple buy-and-hold strategy — you know exactly how much you stand to lose should your investment turn against you.

Frequently Asked Questions