A few months back, an elderly acquaintance, after hearing about my interest in personal finance, asked if I could find some information on a stock that he held. He said that he purchased the stock over 20 years ago and could not even remember the name of the company. He said that he had the stock certificate somewhere and that he would find it for me, if I could find some details about the stock. He was concerned that the company may not even exist today. Unfortunately, he never got back to me about the topic. He moved away recently and so, my chances of knowing about that company are slim. But, his request got me interested in delisted stocks, which we will discuss in detail below.
Listing a Stock
When we buy or sell stocks on any of the major stock exchanges, we seldom think about the criteria that those companies would have had to meet to be able to be listed on the exchange. Being listed on a major exchange makes a company’s shares easily accessible to traders and investors and enhances their reputation.
Nonetheless, there are standards that are set by every exchange that have to be met before approval for listing. Some basic conditions include a certain minimum number of shareholders, shares, and price (dependent on the exchange) that must be satisfied to go with other regulatory requirements. As would be evident, these standards are set to filter out the bad apples and retain only the good corporations with stable records and credible management. These measures become necessary to maintain the reputation of the exchange.
What is Delisting?
Once listed, corporations are still required to maintain certain standards to prove their ongoing adherence to exchange regulations. When a company fails to meet one of the required standards (minimum number of shares, share price, shareholders’ equity, etc.), then an exchange will initiate proceedings to remove the stock from its list, which is termed as delisting. Typically, the ignominy of being booted from a stock exchange is a precursor to the corporation’s demise.
What Happens after a Stock is Delisted?
When a stock is delisted, it does not mean that the company has gone bankrupt. The company is probably still conducting operations though the financial performance may not match its recent past. Such companies are still traded but in a different way.
In Canada and the US, delisted microcap (penny) stocks can be traded as Over The Counter Bulletin Board (OTCBB) stocks or pink sheets. OTCBB stocks are subjected to little regulation and are allowed to trade as long as they stay current with their filings. Pink sheets are riskier than OTCBB stocks as they are not registered and simply offer a quote. Both these types of stocks are highly speculative and characterized by low liquidity.
What about the investor?
As FrugalTrader wrote a while back, such a penny stock investor is likely to be in a situation where they have to look at claiming a capital loss, if the investment was in a taxable account. In the unlikely event of a company managing to do well after being delisted, it still would be difficult to regain the lost reputation.
Have you held a stock that was delisted? Did you manage to trade it as an OTCBB stock or pink sheet? Did you notice that the price dropped further after delisting?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.