It's no secret that the stock market involves a lot of risk and reward.
If you're successful, you can walk away with a significant income.
If you lose, it won't bode well for the future of your finances.
Stocks can go down, but you might wonder – is it possible for stocks to go negative? Can you lose money past absolutely nothing?
In this post, I'll answer the question “can stocks go negative?” and much more. Let's get started!
Can Stocks Fall to a Negative Value?
Stocks rise and fall all the time, but can stocks go negative?
This thought might concern those who invest the stock market – can you lose more than you invested in the first place?
The stock market drops a lot, and some stocks have hit zero before.
However, no matter how far the stock price falls, it can't reach a negative value.
In stock trading, you will always see a number that is zero or greater.
It's critical to note that this doesn't mean you won't lose money – it just means you can't owe money when investing in stocks.
Those who perform margin trading might see their own money plummet as the stock prices shift, which can be extremely costly. While some people think the stock market is gambling, over the long term – it's a relatively safe method to build wealth.
What Happens If a Stock Falls to Zero?
It can be scary to see an investment drop to zero.
What happens if this occurs with a stock you've put funds into for your financial future? Do you lose everything, or are you compensated in some way? What happens if a stock price falls to zero?
If a stock falls to zero, everyone with a common share in the company now has a worthless holding.
You have nothing left in the investment. The company might switch from publicly trading to private until it can get itself back.
Many companies don't want to give up their public status. To regain footing, they must find new investors to keep the company going. Sometimes, this price might be less than a penny.
As an investor, you lose your investment in a company if stock prices drop to zero.
Related Reading: Can You Lose More Than You Invest in Stocks?
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What Can Cause Stocks to Fall to Zero?
We've discussed what might happen to your investment and a company's stock if the value falls to zero.
What factors could cause a company's assets and earnings to tank in a short period?
Here are a few of the common factors that might cause stocks to fall to zero:
- Market sentiment: The sentiment is the driver of demand. How a person observes the rise and fall of stocks contributes to their success in the future.
- The news: The news can impact the stock market! The words that come out of anchors' mouths on the television can influence millions of people in just a few moments.
- Technical factors: Items like a stock split and the time of day an investment occurs can shift the valuation.
- Fundamental factors: Items like profitability and the value of a stock can influence the way investors operate.
As an investor, it's critical to keep an eye on these factors as you make your investment.
Ensure you know when it's time to pull out and when you should stay away from a stock in the first place.
Wise choices based on these factors can make a difference in how much money you lose – or gain.
What Are the Riskiest Stocks & Investments?
If you are interested in investing in a stock, it's critical to understand the best and worst stocks you can put your money in on the market.
Three types of investments stand out as the riskiest on the market today.
- Company stocks with poor management
- Penny stocks
- Short selling
Let's dive deeper into each of these stocks. The more you know about risk, the better a choice you can make for the future of your finances.
Company Stocks with Poor Management
A companies stock with poor management are never an ideal investment.
You want to buy shares from a company with a quality history, not one with a proven track record of poor management.
There can be a reward with these companies – but the risk is significantly higher than other investments.
When you put your money into company stocks with poor management, you risk:
- Unpredictable changes and information
- Failure of a company and loss of value
Another risky form of stocks are penny stocks.
You can invest in these for less than a dollar, though some say penny stocks are less than five dollars.
There is an opportunity for lucrative returns with penny stocks, but the risk is higher than most.
It's always important to invest your money with caution, especially when it comes to penny stocks.
Scams plague the penny market, so anyone unprepared for what to expect can risk losing money.
But not every penny stock is a scam or illegitimate, some smaller companies have lots of potential to earn you big in the future.
If you want to invest in penny stocks, the best thing to do is research. It should be easy enough to determine whether a company's earnings show potential or if it's a scam. For many, penny stocks are too risky to be worth the extra effort required.
Shorting a stock is another risky investment.
When you short a stock, you borrow shares from somebody else, sell the stock, and hope the price falls so you can buy it back at a lower price and return the shares you borrowed.
This is a high-risk investment because if the stock price goes up, you will be forced to buy the stock at a higher price than what you sold it for – and you will lose money.
When you have a short position in a stock, you want the price to go down. This means you're betting against the stock.
However, given the natural tendencies of companies, this can be very difficult to predict and only the most experienced investors should consider this type of investing.
You can certainly be profitable when it comes to shorting stocks. Some investors have made billions through this process, however it's very difficult.
Do You Owe Money If a Stock Falls?
It can be scary to see your stock value go down. You are losing money – but where does that money come from when the stock fails? Do you owe money to the company if your share price falls, or are you in the clear?
You don't owe money if a stock drops. However, it's critical to note that you may lose money on your investment. You are paying – but it's with money you have already put into the stock.
There is one exception to this rule.
With a margin account, you can lose more money than you invest and owe money.
This loss is due to the interest accumulated on the borrowed money and the money left on the loan you have to pay off. Consider whether a cash account or margin account is best for your investing purposes.
Related Reading: Why Are Equities Volatile?
How Can You Protect Your Stocks?
On the market, it makes sense to be nervous about your stocks. Anything and everything can happen to them. As a trader, is it possible to protect your stocks? What can you do to keep your stocks and their values as safe as possible in the trading world? There are many tactics you can adhere to to keep your stocks as safe as possible.
Here are a few precautions you can take to defend your stocks and their values as the stock market shifts:
- Diversify your stock portfolio: It's critical to have a diversified portfolio so you don't have all your eggs in one basket. This can help to avoid losing your entire investment when investing.
- Create an investment plan that is thought through: Ensure you know what your next steps will be.
- Utilize a stop loss order: These put a cap on the amount of money you can lose.
- Make use of long-term investing: Long-term investing offers stronger profits than investing in the short-term.
- Avoid margin accounts: Margin trading is very risky and should be avoided at all costs to limit the amount of money you can lose. Try to avoid borrowed money.
The more prepared you are to defend your investments, the better.
Every move you make on the stock market should be done with careful consideration to ensure you have the best shot at earning money for your investment.
What Sets the Value of a Stock?
What sets the value of a stock? Any stock can fall to zero, but some have a better fighting chance than others due to the value of the stock. What factors determine this price?
Here are a few items that influence the value of a stock to the general public:
- Earnings of a company: How much does the company earn? What does the history of their income look like when examined?
- Investor perception: Do investors think the value should more or less? The perception of the investor can provide a drastic change to a stock's price.
- Supply and demand: Rare stocks with high demand will have a higher value than plentiful stocks with minimal demand on the market.
As you head into the investing world, keep these factors in mind. Anything can influence the value of a stock, from people on the television to events that are happening in the world.
This knowledge will help you make a better investment for your future. Almost anything in the world can cause stocks to change.
What Happens When a Company Goes Bankrupt?
When publicly traded companies go bankrupt, they go through a process or recapitalization where they get one more chance to become profitable.
This means your outstanding shares might get cancelled with zero compensation or the share price drops to zero.
It's also important to understand the type of shares you hold.
Common shareholders, such as the stocks sold through stock exchanges are the least valuable. Preferred stockholders are more valuable and will receive some sort of payment before common shareholders.
Bondholders are even more valuable than preferred shareholders and are first in line to be paid if the company goes bankrupt.
Sometimes, a company is capable of recovering from bankruptcy, in which case the stock price could increase and your initial investment could recover.
What Are the Best Ways to Invest in Stocks?
Are you ready to invest in stocks?
There are many online brokerages and robo advisors that can help you invest in the stock market but some of my favorites include:
Final Thoughts on Can Stocks Go Negative
Share prices rise and fall all the time, often at significant levels.
Sometimes, a value can sink so far that it hits zero.
This amount can't collapse to a negative number, but it's possible to lose everything you invested if the company dissolves after the value of the stock sinks.
It's best to defend your investments by keeping your portfolio diversified, avoiding many stocks in the same industry, and avoid borrowing money to fuel your investments.
The good news as an investor is that the stock price can never go negative.
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