If you are new to investing or are considering starting your investing journey – you might wonder – what is the worst thing that can happen to a stock I own?
Well, I’d say most of us would agree that the worst thing that can happen to a company is that it goes out of business. And if you own stock in a company that goes out of business, the worst thing that can happen is that you lose your ENTIRE investment.
When public companies file for bankruptcy, depending on the chapter they file, they’re placed on a plan where they have to start selling assets to pay creditors. If you own my book you might recall that in Lesson #42 I cover bankruptcy chapters and what they mean for publicly traded businesses.
There is a specific order in which people get paid and it goes as follows:
- Secured debtors
- Unsecured debtors
- Shareholders (people that own the stock).
By the time the company reaches shareholders, all the money has been distributed and the company has been completely dissolved.
Stock investing comes with risks and you should be fully aware of what can happen if something doesn’t turn out as expected.
Should you sell a stock that is going out of business before it completely crashes? You can! However, by the time you sell you might not be getting much back. With that said, most would agree getting something might be better than nothing.
Here are some ways in which you can protect your investment portfolio from something like this happening:
- Make sure you are well diversified – you should NEVER have your money in one single stock or one single investment. Even if a stock you own goes to $0, you should be well positioned so that it doesn’t affect you as much as it would if that investment had a significant position in your portfolio.
- Make sure you buy QUALITY! – Never put your money in junk or things you don’t understand just because they seem “cheap” or you’ve been told the investment is a good one even when you know deep inside is not.
and that brings me to….
- Do your homework* – even if the company has been around for 100+ years, research is still extremely important. Before you buy anything look into competition, whether the company is healthy financially speaking, whether you see the company still around in the next 10-20+ years, among other factors.
And that’s all folks! What other strategies can you implement to ease the blow if a stock in your portfolio goes to $0? Share below!
Cheers to Health, Love, Success, and Profits!