Don’t Buy Stocks in Bankrupt Companies

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I am actually not going to show the newspaper article, because I do not want to name the specific company. But I was reading the news yesterday, and there was this article about a company that has been really struggling during the pandemic, and they are about to declare bankruptcy. But before they declare bankruptcy, they are talking about issuing a new round of stock to help them with their finances. My head almost exploded. And I wanted to talk about this, because there have been a number of companies that have been doing this. Now I do not want to give the list of names, but you can find them yourself. They have all been in the news.

Let me explain what is happening. The stock market has done really good over the last six months. So it is attractive for companies to issue stock as a way to raise money. However, people usually only buy stock if you think you are going to get a return on your investment. That means, you want a company that will be around, making a profit that can eventually flow back to you.

But there is a bunch of companies that are on the verge of bankruptcy. They are looking at all their options on how to stay afloat. And one of the options they are looking at is issuing stock.

So let me give you a little friendly advice. Do not buy stock for a company that is going into bankruptcy. I cannot believe there are people out there actually buying stock in these companies. If you hear a company is heading towards bankruptcy, you should be getting out of holding stock in that company, because you can lose all your money.

For people who are new to investing, I am going to explain to you why. Most large companies are funded through a combination of debt and stock. So when you look at a balance sheet, you will see liabilities and equity. Liabilities is debt, and equity is stock. Just as a reminder, the value of equity listed on the balance sheet is not necessarily the same as the stock price on the market. When a company goes bankrupt, it needs to pay out all it’s liabilities, before it pays anything to people holding equity. People holding debt get preference. Which means if you are a stockholder, everyone else is getting paid before you. So it is really common in bankruptcies for stockholders to get little or nothing, when the company is restructured.

So let’s say you buy $10,000 of stock. You are obviously buying because you think you can make a profit. So let’s say you think the stock is undervalued for some reason, and you have an upside of 8%. You could make $800. But the downside of a bankruptcy is that you could lose everything. So here is your downside. Do you see that you can lose everything?

The stock market is really crazy right now and it is important if you are investing to keep a level head. When I am looking at a stock, the first thing I look at is I do some research to determine if the company might be heading towards a bankruptcy. And if it is, I go look at a different stock. There is plenty of other options out there, why would you risk all your money like that?

And shame on these companies for trying this. Because they are selling stock, when they know the investment is not worth it. And there will be some poor investor out there that is going to fall for it. I think the exchanges and the SEC should not let companies get away with issuing stock before a bankruptcy.

So bottom line, stop buying stock in bankrupt companies, because you can lose all your money.

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

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