Stocks for publicly-traded companies trade on stock exchanges, such as the New York Stock Exchange (NYSE) or the Nasdaq. When you submit stock trade orders through your brokerage app, those orders are carried out on the stock's corresponding exchange.
However, the stocks that are listed on an exchange aren't set in stone. New stocks are added, and some old ones are removed. When a stock is removed from an exchange, it's known as "delisting."
If you bought a stock that was later delisted, it doesn't mean it's a bad thing. But in some cases, it is. It all depends on why the stock was taken off the exchange. Here are some reasons why a stock might get delisted, and what that means for you as an investor.
What Happens When a Stock Is Delisted
Delisted stocks are removed from the exchanges they used to trade on. Instead, they're traded "over the counter" (OTC). These OTC stocks are traded through what are called "market makers." Pricing details are provided by either the Over-the-Counter Bulletin Board (OTCBB) or Over-the-Counter Link LLC.
As far as the shares you own, nothing much changes when a stock is delisted. Your share still gives you the same level of ownership in the company, and the stock can be traded just the same.
The main contrast between an OTC stock and a stock on a major exchange is that your broker is less likely to deal with an OTC stock. That isn't to say that they won't. Nearly every brokerage will be able to offer you stocks that trade on the major exchanges. They don't always offer OTC stocks. If you want to actively trade OTC stocks, you should ensure that you're working with a broker that offers this service.
Even if your brokerage doesn't deal in OTC stocks, you will likely have the chance to sell your shares when the company is delisted. For instance, as of May 28, 2020, Robinhood does not offer OTC trading, so you won't be able to buy more shares of a delisted stock. But you will be able to sell any delisted shares you own. Be aware that if you own delisted stock and want to sell, there may be a time limit. For instance, delisted stock shares could possibly be converted if you don't sell them in a certain amount of time.
Stock exchanges impose rules on the firms that wish to have their shares traded there. These rules are known as "listing standards." There are "initial listing standards" that apply to new stocks. Once the stocks are on the exchange, they must meet "continued listing standards."
If a firm wants its shares traded on the NYSE for the first time, for instance, it must meet certain standards. They include having at least 400 shareholders, a minimum price per share of $2, and a minimum market cap of $50 million. Those aren't the only requirements, and the specifics of a company could alter those minimums.
NYSE's listing standards relax a bit once a stock is on the exchange. The required number of shareholders drops to 300, for instance. But companies must follow other rules, including filing documents required by the Securities and Exchange Commission (SEC). Annual 10-K filings and quarterly 10-Q filings are two examples.
If a company fails to meet one of these standards, the exchange could delist it. If that happens, the shares of that company would move to the OTC market. Delistings don't happen right away, and companies will often get a chance to correct their standing. If the stock price has dipped below the level required by listing standards, then the company could use reverse splits to correct the pricing problem.
When a company is delisted, it is often a bad sign of money or managerial trouble, and it often causes the stock price to fall.
It's possible for a company to ask to delist its stock from the exchange on which it's traded. When a company voluntarily delists, it may not be for bad reasons. One reason could be that it wants to go private. In that case, its shares have been bought out, maybe by a private equity firm. It could be a sign of good things to come for the firm.
A stock might be delisted as a result of a merger or a financial restructuring. In these cases, its stock might move to some other exchange, or it may trade under a new ticker symbol. During mergers, one company may trade its shares for shares in the company that acquired it. Any shareholders will have their shares converted, as well.
The Bottom Line
- As a shareholder, not much changes when a stock you own is delisted from a major exchange. But depending on your brokerage, you may not be able to easily trade shares in that company.
- You should be able to at least sell the shares you owned before the stock was delisted. You may also be able to buy more shares or trade options on the shares, but that depends on how many OTC services your broker offers.
- While not much may change for you, it often isn't a good sign for the company. Delisting might be tied to money troubles with the firm. You should take care to weigh the risks before trading OTC stocks.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.