What Happens When a Stock You Own Is Delisted?
Stocks for publicly-traded companies trade on stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ Stock Market. You may submit stock trade orders through your brokerage app, but those orders are executed 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 subsequently delisted from the stock exchange on which it had been trading, it isn't necessarily a bad thing—though in many cases it is. There are some circumstances in which a delisting might not indicate a problem, but it all depends on why the stock was delisted. 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
Simply put, delisted stocks are removed from the exchanges they used to trade on, and instead, they're traded "over the counter" (OTC). These OTC stocks are traded through "market makers," and pricing information is 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 company is delisted. All else being equal, your newly delisted stock gives you the same level of ownership in the underlying company, and the security can be traded just the same.
The main difference 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 it's altogether unlikely. However, any brokerage you open an account with will almost certainly offer any stock traded on a major U.S. exchange. While many brokerages do trade OTC stocks, some don't. If you want to actively trade OTC stocks, you should ensure that you're working with a brokerage that offers this service.
Even if your brokerage doesn't deal in OTC stocks, you will likely have the opportunity to sell shares that you own if the company was delisted while you held the shares. For example, 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 currently own.
Stock exchanges impose rules on companies that wish to have their shares traded on the exchange. These rules are known as "listing standards." There are "initial listing standards" that apply to new stocks, and once they're on the exchange, they must meet "continued listing standards."
If a corporation wants its shares traded on the NYSE for the first time, for example, requirements imposed on the company include a minimum of 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, such as decreasing the required number of shareholders to 300, but there are still requirements. For example, companies must adhere to the disclosure requirements required by the Securities and Exchange Commission (SEC), which requires annual 10-K filings and quarterly 10-Q filings.
If a corporation fails to meet one of these criteria, the exchange could delist it, and the shares of that particular company would move to the OTC market. Delistings don't happen immediately, and companies will usually get an opportunity to correct their standing. If the stock price has dipped below the minimum 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 serious sign of financial or managerial trouble, and it generally causes the stock price to fall.
It's possible for a company to voluntarily delist its stock from the exchange on which it's traded. When a company voluntarily delists, it may not be for negative reasons. This may occur when a company goes private—its shares have been bought out, potentially by a private equity firm, and it could be a sign of good things to come for the company.
It's also possible for a stock to be delisted from a stock exchange as a result of a merger or of a financial restructuring. In these cases, its stock might have moved to a different exchange, or it may trade under a different symbol. During mergers, one company may exchange its shares for shares in the company that acquired it, and 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. However, depending on your brokerage, your ability to actively trade shares in that company may become restricted.
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 derivatives on the shares, but that depends on how many OTC services your broker offers.
While your ownership of the stock may remain the same during delisting, it isn't usually a good sign for the company. Delisting is usually tied to either financial or managerial troubles. Investors should carefully consider the risks before actively trading OTC stocks.
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