If you are new to investing – you might be tempted to buy stock in bankrupt companies. Why? Because oftentimes, the per-share price is cents on the dollar.
For example, companies like JCPenney and Hertz are currently trading for $0.18 and $1.39 per share, respectively.
What many people don’t know is what’s happening “behind the scenes” of a bankrupt company.
If you own my first book you might recall that in Lesson #42 I cover bankruptcy chapters and what they mean for publicly traded businesses.
Here’s the rundown:
When a company goes out of business and depending on the chapter they file, they’re placed on a plan where they have to start selling assets to pay creditors.
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.
It all boils down to this: By putting your money in bankrupt stocks you are 100% GAMBLING your money. Gambling is not investing.
Think of it as walking into a casino for the first time in your life and deciding you will sit down at a blackjack table, will put your cash down, and hope for the best.
I would never in a million years tell anyone to put their hard-earned money in companies that are going out of business.
Gambling is not investing.
However, I can’t put my head in the sand. I understand that some people will do it anyway.
If that’s the case for you – just make sure it is money you can 100% afford to lose and will not be mad if your investment goes to $0. Also, go in with some kind of strategy. Don’t just buy and forget because you might come back to your investment being wiped out.
And that’s all folks! Let me know your thoughts in the comments.
Cheers to Health, Love, Success, and Profits!
-Mabel
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