A stock is considered delisted when it is removed from the exchange listings. This can be a company-initiated action or an exchange-initiated action because the stock no longer meets the exchange’s listing requirements.
When a company first applies for a listing on an exchange, it must meet the exchange’s specific listing requirements. To keep its listing on the exchange, it must continue to meet these requirements. If a business fails to meet these standards, it may be placed on probation. Companies in this probationary period are allowed to trade on the exchange for a limited time while they work to resolve any issues, and they are identified by a “BC” after their stock symbol to indicate that they are currently out of compliance with exchange requirements.
The exchange notifies companies that are out of compliance and informs them that delinquencies must be addressed. Companies have 10 days to respond after that, or the exchange will delist them. That would be an unintentional delisting. Following delisting, the stock may continue to trade over-the-counter (OTC).
When is a stock taken off the market?
There are a variety of reasons why a stock may be delisted. To stay in compliance, the Nasdaq has three main requirements:
A minimum price of $1 per share is required.
There are at least 400 shareholders in total.
Shareholders’ equity of at least $10 million, a market value of at least $50 million, or total assets and revenue of at least $50 million each are all required.
Companies must also promptly report all material news to the Securities and Exchange Commission (SEC), file quarterly and annual reports on time, and comply with a number of ongoing corporate governance requirements. If the company fails to meet any of the requirements, its stock may be delisted from the exchange.
Companies can also opt to be removed from the list. When a company is taken private or merges with another publicly traded company, this happens. The company could move its stock to a different exchange or even go out of business, liquidating its assets and returning the proceeds to shareholders.
Is it possible to relist a delisted stock?
It is theoretically possible for a delisted stock to be relisted on a major exchange, but this is uncommon. The delisted company would have to avoid bankruptcy, resolve the issue that led to the delisting, and meet the exchange’s standards once more.
A delisted company going bankrupt and the delisted stock becoming worthless is more common than a relisting. The company could be bought out of bankruptcy by a private owner or forced to liquidate. The company could also restructure and eventually go public by issuing new shares to new shareholders in an initial public offering (IPO). While the company remains the same, the bankruptcy usually wipes out the original shareholders’ investment.
After Delisting, You Can Trade
After a stock is delisted, it can trade on one of three over-the-counter (“OTC”) exchanges. Trading OTC has some advantages, such as gaining access to early-stage companies that aren’t large enough to trade on the NYSE or Nasdaq (such as Walmart used to be) or foreign companies that trade on non-US exchanges (such as Nestle, which trades on the SIX Swiss Exchange). The lower barriers to entry on the OTC, on the other hand, mean higher fraud risks and less transparency into a company’s operations. It’s uncommon for a delisted stock to resurface on more traditional exchanges. To do so, it would have to avoid bankruptcy, resolve the issue that led to the delisting, and re-acquaint itself with the exchange’s requirements.
Investors’ Reaction to Delisting
Stockholders retain ownership of a stock that has been delisted. Delisted stocks, on the other hand, frequently experience significant or complete devaluation. As a result, even if a stockholder still owns the stock technically, their ownership will almost certainly be significantly reduced. Stockholders may lose everything in some cases.
Even if a company continues to operate successfully after being delisted, it may face trust issues as a result of the loss of its reputation for reliability and accuracy in reporting. Companies that are delisted often lose their reputation and gain a stigma for failing to meet the major exchanges’ requirements.
Stockholders will receive a cash buyout or shares in the new, acquiring company if a company delists voluntarily.
Taking Care of Your Delisted Stock
You’ll have a lot of questions when you learn that a company in which you have invested is being delisted. Why? So, what’s next? Will I be able to recoup my investment?
The public will be notified of the delisting and the reasons for it. Evaluate your position and decide whether you should keep or sell your shares. What is the firm’s strategy? Is the company planning to go public over-the-counter? While this does not inspire much confidence in a company’s long-term viability, it is preferable to learning that it is going bankrupt. When a company files for bankruptcy, its original shares are usually wiped out, and shareholders are usually not entitled to newly issued stock when the company emerges from bankruptcy, making their investment worthless.
How do I sell a stock that has been delisted?
If you are aware that a company may be delisted, selling your stock is probably a good idea. Involuntary delisting and the events that lead up to it reduce a company’s value, and if the company files for bankruptcy, you could lose your entire investment. When a stock is delisted as part of a merger or when a company is taken private, you only have a certain amount of time to sell your shares before they are converted to cash or exchanged for the acquiring company’s stock at a set conversion rate.
When a company trades over the counter, you can still sell your shares, but the bid/ask spreads may be wide, making it difficult to find buyers willing to pay your desired price. Although some brokerages prohibit such OTC transactions, you can usually sell a delisted stock in the same way that you would a stock that trades on a stock exchange. Even if the company files for bankruptcy, a delisted stock can continue to trade over the counter for years.
If you think buying delisted stocks is a good deal, you should steer clear of this trap. These businesses are frequently in bankruptcy or have severe financial difficulties, and they trade like penny stocks.
Conclusion
You will not technically lose your shares if a company is delisted. However, due to a lack of liquidity and a general aversion to secondary markets, your shares are likely to lose the majority of their value. A company may turn around and relist in rare cases, but more often than not, you are left holding the bag.
