Is trading a delisted stock risky? And what does it mean when a stock is delisted?
Over the past year, we’ve seen everything in the markets — record trading numbers, rocketing volumes … and many delistings.
Why would a stock be delisted? And can you still trade it?
As a trader — especially if you’re interested in trading lower-priced stocks — it’s important to know exactly what delisting is and why it happens.
Especially in such a volatile market.
Read on to learn what a delisted stock is and how to trade one, and to see some examples of stocks that have lost their listings.
Let’s get to it!
Table of Contents
- 1 What Does ‘Delisted Stock’ Mean?
- 2 Why Would a Stock Be Delisted?
- 2.1 How Does Delisting a Stock Work?
- 2.2 At What Price Is a Stock Delisted?
- 2.3 Delisting: Voluntary vs. Involuntary
- 3 What Happens If a Stock Is Delisted?
- 4 Will You Lose Your Shares If a Company Gets Delisted?
- 5 Examples of Delisted Stocks
- 5.1 Rosetta Stone Inc. (NYSE: RST)
- 5.2 Liberty Property Trust (NYSE: LPT)
- 5.3 Yingli Green Energy Holding Co. Ltd. (OTC: YGEHY)
- 6 3 Reasons for a Stock to Get Delisted
- 6.1 Merger or Acquisition
- 6.2 Violating Exchange Requirements
- 6.3 Bankruptcy
- 7 Is There a Way for a Stock to Avoid Getting Delisted?
- 8 What Should You Do if You Own a Delisted Stock?
- 8.1 Step 1: Research
- 8.2 Step 2: Consider Your Position
- 8.3 Step 3: Make Your Decision and Don’t Follow the Leader
- 9 Trading After a Delisting: Key Points You Should Consider
- 9.1 Tip #1: Better Understand OTC Markets
- 9.2 Tip #2: Create a Plan
- 9.3 Tip #3: Know When to Get Out
- 10 What Happens to a Stock When a Company Goes Bankrupt?
- 11 StocksToTrade
- 12 Conclusion
What Does ‘Delisted Stock’ Mean?
Simply put, a delisted stock is a stock that’s been removed from a major stock exchange, like the New York Stock Exchange (NYSE) or Nasdaq.
It can be any stock, on any major stock exchange.
To trade on the major exchanges, a company has to meet a set of requirements. Failure to do so will result in a warning. And if the company continues to fall below the requirements, it could be delisted.
A company can also voluntarily delist its stock. More on that in a bit. First, let’s cover…
Why Would a Stock Be Delisted?
A voluntary delisting is when a company decides to pull itself from the market. That may be because the company is involved in a merger or buyout or is going private.
In an involuntary scenario, the exchange removes the company for violating its guidelines.
Major U.S. exchanges can boot a stock if it trades below $1 a share for a period of time or if it fails to meet requirements for market value, corporate practices, or listing fees.
Those stocks often end up trading on OTC markets as pink sheet securities…
How Does Delisting a Stock Work?
A big exchange has a reputation to maintain and doesn’t want to mess around with shady companies. So when a stock is in violation, the company is put on notice.
If the company fails to meet the requirements within the required amount of time, it’s delisted from the exchange. From there, it can head to the over-the-counter (OTC) market exchanges.
At What Price Is a Stock Delisted?
The NYSE, Amex, and Nasdaq all require companies to keep their shares above $1. If a stock stays below that level, the exchange will begin the delisting process.
Each exchange has its own set of regulations and standards that every listed company must abide by, but the rules are similar — kind of like sports leagues. The National Football League, National Hockey League, and Major League Baseball all have their own rules, but generally, they follow the same guidelines.
Delisting: Voluntary vs. Involuntary
There are many reasons why a stock may be delisted — but not all are necessarily bad.
A company can opt for a voluntary delisting if it goes private or is bought out by another public company in a merger.
An involuntary delisting isn’t so pretty…
What Happens If a Stock Is Delisted?
Any company in the process of delisting, whether voluntary or involuntary, must make a public announcement.
When a stock’s delisted, it’s removed from whatever exchange it traded on. What happens next depends largely on the reason for delisting…
If the company delists voluntarily, shareholders will receive a cash buyout or shares in the new, acquiring company.
In an involuntary situation, shareholders could lose everything. That’s what you need to watch for if you trade low-priced stocks.
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It depends. Most often, you won’t lose your shares — but they could be worth less.
When you buy shares in a company, you own them until you sell them. In a voluntary delisting, the company may redeem the shares from you.
In an involuntary delisting, the stock could still trade on an OTC market like the pink sheets.
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Examples of Delisted Stocks
Rosetta Stone Inc. (NYSE: RST)
This world leader in language-learning software was once a staple on the NYSE.
The company netted early investors a 330% return from 2015 to 2020.
In September 2020, the company said it agreed to be acquired by Cambium Learning Group, a portfolio company of Veritas Capital. It delisted from the NYSE soon after.
Liberty Property Trust (NYSE: LPT)
Liberty Property Trust, a commercial real estate investment trust operating in the U.S. and the U.K., was acquired by Prologis Inc. in February 2020 for $13 billion in stock.
Under terms of the deal, Liberty shareholders got the right to receive 0.675 shares of Prologis for every Liberty share they owned before the acquisition.
Yingli Green Energy Holding Co. Ltd. (OTC: YGEHY)
Yingli Green Energy Holding Co. was a holding company for Chinese solar power and renewable energy research company Yingli.
In September 2020, the parent company said it was insolvent and would liquidate.
The company went public in 2007 and once traded for $383 per share. Its closing price per share in September 2020? $0.098.
3 Reasons for a Stock to Get Delisted
Let’s look at the three biggest reasons why stocks are delisted…
Merger or Acquisition
When two companies merge, one of the two will delist its stock. Or they’ll combine to create a new ticker…
Shareholders receive a buyout or rights to the acquiring company’s shares.
For example, in 2019 Newmont Mining Corp (NYSE: NEM) merged with Goldcorp Inc. to form Newmont Goldcorp Co. Newmont shareholders got 65% ownership of the combined company.
Violating Exchange Requirements
The large stock exchanges all require listed companies to maintain certain standards or face delisting.
Nasdaq-listed companies, for example, need to maintain a $1 million valuation for all publicly held shares, have a minimum number of stockholders, and follow certain standards of conduct, such as disclosing any news that might affect the stock’s value.
Bankruptcy
When a publicly traded company declares bankruptcy, it’s never a good sign. News of bankruptcy is likely to cause a stock plunge, and traders could sell in a panic.
After a company files for bankruptcy, its stock will be delisted.
Is There a Way for a Stock to Avoid Getting Delisted?
Once the delisting process has begun? Usually not…
The best way for a company to avoid getting delisted is to stay above the exchange’s minimum standards.
Sometimes a company will engineer a reverse stock split to avoid delisting.
A reverse split combines several shares into one and multiplies the share price … That can bump the stock price back above the exchange minimum.
For example, a 1-for-10 reverse split could raise a stock’s price from 50 cents per share to $5. In that case, the stock would no longer be at risk of delisting.
What Should You Do if You Own a Delisted Stock?
Discovering you own a delisted stock or a stock that’s in the process of being delisted can be a scary thing for a trader if you’re not prepared…
So be diligent. Keep up with the news — especially on the stocks you trade. If you need a way to keep track of all your trades and investments, consider a portfolio tracker.
Find out which stocks I keep an eye on — there’s no cost and can help you prepare every week. Sign up for my weekly watchlist here!
And if you do find yourself with some delisted shares, follow these steps…
Step 1: Research
First, do your research every day. You need to constantly study the news, your stocks, and the overall market.
An informed trader is a smarter trader.
Learn all you can about the company and why it’s being delisted. You can’t make an informed decision unless you have all the information.
Step 2: Consider Your Position
What kind of trade is this for you? Is this stock a day trade? Are you holding longer for a swing trade? Consider what your position is in the stock.
When a company begins the delisting process, it could become a risky and volatile trade.
If you’re holding for a swing trade, consider your position. Look at the company’s plans, news, and announcements.
Will it remain public and trade on an OTC market? Is it filing for bankruptcy or merging with another company? There’s a lot to consider. It may be time to cut your losses.
Step 3: Make Your Decision and Don’t Follow the Leader
It’s very easy to get swept up in the hype of Twitter, chat rooms, or group texts!
But most of the time, the chatters are wrong. Especially when it comes to a delisted stock … Everyone thinks they’re an expert.
Don’t follow anybody when it comes to your trading. Learn to do your own research, then come to your own conclusions.
Trading After a Delisting: Key Points You Should Consider
Can you still trade a stock after a delisting? Yep, but you need to be smart about it. Here are some tips…
Tip #1: Better Understand OTC Markets
So you’re holding a stock that’s about to be delisted or has already begun the delisting process … that stock could be heading for the OTC markets.
These stocks tend to have lighter volume and higher spreads. Buy and sell orders take longer to execute, and the stocks can be really tough to trade.
Most pink sheet stocks are penny stocks. Small companies with big dreams often have a bad rap for being marketed to unsuspecting traders. Ultimately, most of these companies will fail.
Studying trading patterns and current news is key to staying ahead of the game and knowing which moves to make. Sign up for newsletters, emails, or the StocksToTrade Breaking News Chat to stay up to date.
Tip #2: Create a Plan
I talk a lot about creating a plan for a reason: It’s crucial.
No matter what kind of situation you find yourself in, it’s best to have a trading plan. You need a strategy to stick to and reference.
Do your research, read the StocksToTrade blog, and create a solid entry and exit plan. Stick to your plan, and follow your strategy.
Tip #3: Know When to Get Out
No one wants to take a loss on a trade, but sometimes you have to.
We talk about this all the time in the SteadyTrade Team as we keep an eye on the markets.
If you’re holding a stock that was involuntarily delisted from a major exchange, most of the time it’s bad news. It’s probably a bad egg and you should consider cutting your losses before it’s too late and your shares become worthless…
Sometimes losing a little, as opposed to everything, is a victory in itself.
What Happens to a Stock When a Company Goes Bankrupt?
When a public company announces it’s declared bankruptcy, it’s usually time to start reconsidering your trading position. Bankruptcy could sink a company’s stock price.
The outstanding shares of a bankrupt company will usually end up being worthless … or at best, worth a fraction of their previous value.
It’s an incredibly risky trade to make. Whether you want to take a day trade position or a longer-term, swing trade position, you’re playing with fire.
StocksToTrade
Finding delisted stocks trading on OTC markets or stocks heading for delisting can be difficult. Pink sheet securities aren’t always easy to research or keep track of.
There are so many to choose from, it’s hard to tell which are worth watching and which you should ignore. When it comes to trading, it’s better to be in the know.
The key to finding stocks that are moving every trading day is by using a good stock scanner. StocksToTrade is a powerful platform with tons of great built-in scans and features that can help you find the best stocks to trade every morning. You can even search for pink sheets!
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Conclusion
Trading a delisted stock or a stock headed for delisting can be an avoidable risk. If you don’t have to do it, don’t. It’s simple.
The risk is big, and there are so many better, hotter trades to make!
The best thing to do if you find yourself holding a stock in danger of delisting is to do your research, create your plan, follow your trading strategy, and know when to get out.
Take your losses when necessary …. Don’t believe the hype.
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What experience do you have with delisted stocks? Let me know in the comments!
