What happens when a company gets delisted? Did you know that if a company’s share price falls too far, it can get kicked off the exchange? Not surprisingly, this can be a scary time for those who own shares in the delisted company. But don’t fret; today, we’ll discuss what happens when a company gets delisted.
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What Happens When a Company Gets Delisted?
When companies go public, they get on exchanges like the New York Stock Exchange (NYSE) and the Nasdaq. These are two of the largest exchanges in the world. Both are located in New York and are worth a staggering $21 trillion.
With over 2,400 companies listed, you can find the NYSE on Wall Street. Likewise, the Nasdaq, with 3,800 companies, is in Times Square.
However, the growth of stock markets in Europe and Asia accounts for the rapid global risk of publically traded companies. Approximately 630,000 companies worth over 80 trillion dollars trade publicly worldwide, by most estimates.
Notably, this almost equals the global economic output of the entire world! But what happens when a company gets delisted?
5 Second Takeaway
To stay listed on the stock exchange, a company must:
- ensure the stock price says above $1 per share
- file their financial statements as per the requirements of the SEC
- stay current with Exchange dues
Publicly Traded Company Overview
A public company is traded on a stock exchange and can make money for its shareholders. To be considered a public company, three criteria must be met:
- The market must be active in which the company shares are bought and sold.
- There must be a Board of Directors for the company.
- The company must have filed an initial public offering registration statement with the Securities and Exchange Commission (SEC).
So, what happens when a company gets delisted?
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What Does the Term Delisting Mean?
Delisting is the term we use to describe removing a company from the exchange it trades on. To be listed on major exchanges requires complete transparency in all financial dealings. In addition, the stock price must stay over $1.00 per share.
What happens when a company gets delisted? Delisting a company’s stock happens due to failing to meet the exchange’s laundry list of requirements. Take, for example, bankruptcy.
Businesses can undoubtedly encounter difficulties, especially in these tough economic times. Unfortunately, in some cases, A key consequence is bankruptcy. In such cases, they might be removed from exchanges in a process known as delisting.
Different exchanges have different rules. However, delisting is a consequence when a company’s shares fall below $1 for an extended period.
Delisting can happen if a company’s market cap, or total dollar value, falls below a certain amount over 30 days. In the case of the New York Stock Exchange, for example, that dollar value is $15 million.
Essentially, it gets kicked off the exchange, and the trading of shares comes to a dead stop. Unfortunately, it’s now not held to the strict rules and requirements of regulatory bodies such as the SEC.
They may choose not to file quarterly financial statements or disclose any information about their operations. This lack of transparency can make it hard for an investor to determine how the company is doing or the risk of owning shares.
What Happens Before Delisting?
What happens when a company gets delisted? Luckily there’s a bit of wiggle room from the SEC before delisting. They’ve got about six months to drive the share price back up. Many companies accomplish this by doing a reverse stock split.
With a reverse stock split, a company reduces the number of shares it has for sale. Doing so increases the price. If you remember the scarcity principle from Economics 101, the price of a good, which has low supply and high demand, rises to meet the expected demand.
Alternatively, the opposite option is a stock split. During a stock split, a company increases the number of shares outstanding, making them more affordable. So, even though the share price drops, the company’s total market value stays the same.
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When Kicked Off Exchanges
What happens when a company gets delisted? When companies start a major exchange, they can trade on a smaller exchange like the “over the counter” (OTC) exchange. One example is the Over The Counter Bulletin Board (OTCBB) or pink sheet system. Their name comes from the fact that the OTC stocks’ listings were printed on pink sheets of paper.
Do you still own the shares if a company is delisted? Yes. You can’t trade them until the company is re-listed.
A Word of Warning
Unfortunately, since the NYSE or NASDAQ exchanges don’t list OTC penny stocks, the companies don’t have to follow strict rules and regulations. As a result, those companies unwilling to play by the rules – perhaps in bankruptcy filings, will often trade on the OTC market.
Another thing to be aware of is the ease of corruption in the penny stock world. Also, their lack of liquidity makes them far more susceptible to manipulation, hence making them dangerous to trade.
How to Stay Listed on the Exchange
Depending on the particular exchange, you’ll see different Listing requirements. Take, for example, the New York Stock Exchange (NYSE). As I said, if a security’s price closed below \$1.00 for 30 straight trading days, the exchange would initiate the delisting process.
Furthermore, the significant exchanges also impose requirements related to market capitalization, minimum shareholders’ equity, and revenue outputs.
From a bookkeeping perspective, public companies must stay current with paying exchanges their annual listing fees due while dutifully covering the legal and compliance costs associated with listing on an exchange.
All investing and trading involve risk, and you can always lose money on your investments. However, Bullish Bears highly suggest that you exercise extreme caution trading OTC as they may be hard to sell for liquidity reasons or a lack of buyers.
