Introduction
Delisting a stock isn't an extraordinary phenomenon - it isn't even rare, in fact. There are times when a company just can't continue to trade its shares any longer, and that's when delisting of its stock happens. This data by StockAnalysis shows that in 2020, 70 of the major US companies got delisted from the US stock exchanges.
The reasons for a company's delisting can be many - the major one being that it fails to meet the listing criteria stipulated by the stock exchange of the region/country. A plethora of other factors are at play here, as well - mergers, for example. When the ownership of a company changes, it cannot trade under the same share name it used to.
Whatever the reason for delisting, it never has any good news - neither for the company itself nor for its shareholders. Let's discuss the meaning and implications of delisting in detail, and try to understand how to avoid investing in such stock.
What is Delisting of Shares?
Delisting of shares occurs when listed security is removed from the roster/trading boards of a stock exchange. In simpler words, a company releases its shares to be traded in the stock market when it meets certain listing criteria prescribed by the stock exchange. When that company pulls its shares out from the listing - whether voluntarily or involuntarily - traders can no longer perform any operations with those shares. The stock exchange removes that stock from the trading list.
Delisted shares can still be traded in the Over The Counter network through dealers other than the centralized exchange bodies. However, a delisted stock may not necessarily fetch a good value in return - it may even become worthless.
So...why does delisting occur? Let's see a few reasons.
Why Does Delisting of Shares Occur?
Delisting of a company's shares may be voluntary or forced by the situation or a consequence. There are several reasons that are based on the health of the company, the ownership, share value, etc. that may hint at a delisting threat. Here are a few reasons a company may get delisted.
The Company Does Not Meet The Stock Exchange Criteria
Every stock exchange - whether Nasdaq, BSE or any other, for that matter - has its own set criteria for companies to qualify in order to be eligible for listing on its trading boards. For example, BSE prescribes that the minimum market capitalization for a company needs to be ₹25 Crores, in addition to several other requirements. Similarly, Nasdaq has its own criteria - like the minimum share value shouldn't be lower than a dollar for more than 30 days, among others.
Pro Tip: In order to avoid parking your money in shares that would inevitably be delisted, always follow the statements that the companies release regarding their credentials like market cap value, shareholder percentage, minimum revenue, etc. and tally them with the stock exchange standards regularly. If you see a non-compliance happening, immediately work out an escape plan.
The Company Applies for Bankruptcy
Bankrupt companies have no remaining assets left to function, and their shares are practically worthless. When a company files for bankruptcy, the stock exchange removes its shares from its listings. Two scenarios can happen here: the Chapter 11 bankruptcy where a company is merely seeking time to recover, which may give your stocks a second life; second, the company has cancelled its stock - which makes your stock worthless.
With that said, you can still trade your stock for chump change on Over The Counter deals.
Pro Tip: Always closely follow the financial health of your preferred stock company. Numbers like financial ratios, share values, compliance and other parameters help you infer whether or not it is likely to go bankrupt with these trends. If you get warning signs, you can always pull your money out and invest elsewhere in the nick of time.
Mergers / Acquisitions
Mergers and acquisitions are unique cases where shares get delisted for the dissolved entity and relisted for the newly-formed or acquiring company. In the case of mergers, the stock of both merging companies will get delisted, and the stock value of the new entity formed will be higher than both individually for a short amount of time. On the other hand, in the case of acquisitions, the acquiring company's stock will dip owing to debt payoffs and other formalities, post which it will rise steadily. The acquired company's stock will be delisted.
Pro Tip: Follow the news closely to keep an eye on the business decisions of your preferred stock company. If a merger is in the works, disinvest from the stock, and reinvest in the newly formed company. For acquisitions, it makes sense to disinvest from the acquired company's stock and invest in the buyer.
Conclusion
Delisting can have severe implications on the company as well as the shareholders. Especially in the case of shareholders, there is a significant sunk investment involved. To ensure that you aren't parking your funds with a dicey company, follow this quick guide to help you navigate the basics of choosing the right stocks that aren't under the threat of being delisted.