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Can Stocks Go Negative? And Can You End Up Owing Money?

Can Stocks Go Negative? And Can You End Up Owing Money?

Investing is a very wide and diverse activity, with countless different companies, commodities, and other assets available in which to invest. Some types of investments can even accrue a negative value, such as the NYMEX oil futures at the height of the recent pandemic, which hit a value of nearly -$40, and many people are hesitant to invest in stocks because they are unsure of whether stock prices can dip into negative territory.

The short answer is no; stocks cannot have a negative price. While stocks can drop far enough to have values of fractions of a cent and even zero, the price of a stock cannot have a negative cost. It is possible, however, to lose money if leverage was applied. 

Even though the price of any given stock on an exchange cannot reach negative values, it can become worthless and reach a value of 0. While in most cases, this means that the investor simply lost their initial investment or the price they paid for the stock shares, this isn't always the case, and there are situations where someone may end up owing their brokerage money if the stocks were traded under certain circumstances.

market down up

Can Stocks Go Negative?

Technically, the mechanics of stock listing will not allow a stock price to reach a negative value, although a stock price can hit 0. In fact, it's not uncommon for a stock price to hit 0, though in most cases, they will be delisted from the market well before that happens. With the rules behind the stock exchanges and the requirements to have a particular company's stock listed there, it is relatively uncommon to actually see a stock become worthless while still remaining in the public's eye.

When a stock hits 0 it is usually because they go out of business or entered a bankrupt state. Recent and well-publicized examples of companies whose share prices bottomed out following a declaration of bankruptcy and subsequent delisting from the major exchanges are those of Sears Holdings Corporation and Lehman Bros. In both cases, any investment that shareholders had in the companies was essentially lost when the shares fell to 0 or near-0.

Even though in some cases of bankrupt companies, such as the former retail legend, Sears, while the stock technically still has some value, for all intents and purposes, it is essentially worthless. Sears' stock at one time was more than $200 per share, while at the time of writing, shares of SHLDQ are still traded on the OTC markets for $0.03 per share. OTC markets are the markets where "penny stocks" can be bought and sold, in some cases, for thousandths of a cent per share.

How Are Stock Prices Set?

Unlike many other types of investments, there is no central authority, government, or financial group which maintains or sets the prices of individual companies' shares of stock. For every individual stock, there are a complex array of variables that come into play that determine their ultimate value and corresponding market price. The most influential factor is the investors who buy and sell the stock or asset on the exchanges.

Supply & Demand

The supply and demand behind a company's stock can be one of the most significant price drivers. There are bid prices and ask prices, and they determine how much the stocks are sold for, based on who is offering which shares at which price. At any given time, there can be hundreds of thousands or even millions of shares available for sale on the exchange, but they may all have different prices.

For example, if someone wants to buy 100,000 shares of fictional ticker ABXY for the current exchange-listed price of $12 per share, they submit an order for such. Based on the supply, they may or may not get that order for 100,000 shares filled with all shares costing $12. There may only be 80,000 shares available for $12, while the next lowest price that someone who already owns the shares is willing to sell them for now, is $13. This means that the demand drove the price up an additional $20,000 from the original planned cost for the investor.

Also read: Diversifying Your Stock Portfolio

Company Earnings & Perception

Earnings reports can have an incredible effect on the price of stock shares and can boost or diminish the public and investor perception of that company. This is another way in which prices can run or fall with a simple quarterly earnings report. Since quarterly earnings reports are a mandatory requirement of any publicly traded company, this is a convenient metric to use to determine the general performance of a particular organization.

If a company posts record earnings, the public and investor perception of that company is going to be one of high worth or value. This can have even more value and influence on public opinion if the company is expected to post low earnings or earnings below expectations. Companies that have the financial appearance of coming back from a slump are highly likely to cause a run in sales of stock shares, which will also generally correlate with increases in stock prices due to higher demand and lower supply.

The opposite is true for companies that appear to be doing well financially, and are expected to post increased earnings, or even record earnings, and subsequently end up reporting that earnings are down. This can cause the perception of the company to shift significantly and cause a run on people selling the stock. Since, in this scenario, people are losing confidence in the company, they will be trying to exit their long positions, causing a surge in supply, a drop in supply, and a commensurate drop in the stock price.

two man working stocks

What Happens When A Stock's Price Drops Too Low?

The biggest and most popular major public stock exchanges like the NYSE or the NASDAQ have established guidelines for companies to follow in order to maintain their listing on the exchanges and the ability to have the public buy and sell shares of their companies. In order to maintain a listing on the NASDAQ, for example, a company must maintain at least 1.25 million shares to be available for trading, and the shares must maintain a value of at least $1. The NYSE works slightly differently, and while it requires a minimum of 1.1 million shares to remain available for trading, they do not have a minimum share price and only requires a minimum market cap of $400 million.

There are other additional security requirements and regulatory guidelines imposed, and in addition to those, the shares must maintain the market minimum requirements to stay publicly listed. It is incredibly common for companies to become delisted if they cannot maintain the required minimums. Even though there are strict regulations in place to make sure that companies are maintaining appropriate volume and value, there are still some allowances to reestablish these conditions if they fall behind.

In most cases, the exchange will issue the company a warning that they are in danger of being delisted from the exchange and will advise them what conditions they aren't meeting. This warning usually happens when the company's share price has fallen below the minimum and is their notice that they have 30 days to reclaim the required value or be delisted. The most common solution to this scenario is for the company to do a "reverse stock split," which can increase the price considerably.

A reverse stock split combines outstanding shares and can be a 2:1 split or more, with some reverse splits being as severe as 5:1. While it decreases the number of shares that are owned, it increases their value. For example, if you entered a 2:1 reverse split holding 100 shares with a hypothetical value of $.055, you would come out of the split with 50 shares, but they could be worth $1.10 per share, depending on the split specifics and the market cap of the company.

Related post: Can I Buy Stocks With a Credit Card? [WHAT TO CONSIDER]

Can You Lose More Than You Invested?

Simply buying shares with cash and holding them will never result in an investor losing more than they initially invested in the stock. However, applying leverage to a stock purchase or using other financial instruments like derivatives can lose the investor significantly more than the invested funds.

This also applies to investors who trade on margin, which is trading with funds borrowed from their broker. While it won't change the initial price of the shares that are purchased, buying on margin often incurs an interest accrual, which can substantially increase the losses, should the share price fall.

Unless Leverage Is Applied Losses Are Limited To The Stock Price

Even though stock prices can swing significantly and sometimes frighteningly quickly, investors who buy stocks with cash will never lose more than they invested. Investors that choose to use more complex financial tools like margin trading or applying leverage to purchases can run into significantly higher losses should prices fall quickly or liquidity issues emerge.

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