Initial public offerings (IPOs) have become one of the most exciting events on Wall Street after the dotcom heyday created more paper millionaires than any other time in history. Even though IPOs continue to dominate the press, many small investors are instead beginning to discover the vast opportunities available in delistings, which are the opposite type of transaction.
How DoDelistingsWork?
Delistings occur when companies decide to delist their stock from stock exchanges in a move to privatize or simply move to the over-the-counter (OTC) markets.
This process occurs in one of two ways:
- Voluntary Delistings occur when a company decides that it would like to purchase all of its shares or move to an OTC market while in full compliance with the exchanges. Usually, these are the types of delistings that investors should carefully watch.
- Forced Delistings occur when a company is forced to delist itself from an exchange because it fails to meet the listing requirements mandated by the exchange. Typically, companies are notified 30 days before being delisted.Share pricesmay plunge as a result.
Advantages and Disadvantages of Voluntary Delisting
Companies may decide to deregister for a variety of reasons that can be either good or bad for shareholders.
A few of the most common reasons include:
- Capital Savings - The costs of being a publicly traded company are substantial and are occasionally difficult to justify with a low market capitalization, especially after Sarbanes-Oxley laws called for increased disclosures. As a result, deregistering can save a company millions and reward shareholders with a higher net income and earnings per share (EPS).
- Strategic Move - Company shares may be trading below intrinsic value, compelling the company to acquire its own shares as a strategic move. This typically results in shareholders being rewarded with substantial returns over the short term.
- Regulatory Concerns - Stock exchanges such as the Nasdaq and New York Stock Exchange have minimum requirements for companiesto remain listed. If a company does not meet those requirements, it may be forced to delist itself. Causes for delisting may include failure to file timely financial reports, lower-than-required stock price, or insufficient market capitalization. In the end, companies can have a clear bottom-line incentive for delisting their stock from public exchanges —it's not necessarilya bad thing!
How to Profit from Delistings
Delistings may make sense for companies, but how can the average investor take advantage of the situation? Well, the best opportunities are found in companies that voluntarily delist to go private and cash out their shareholders. Typically, this is because management is confident that the company is undervalued or could save substantial money by operating as a private enterprise. These efforts to cash out shareholders can often yield substantial returns to investors willing to do a little homework.
The key to this strategy is finding instances where tiny companies are trying to "cheat" the Securities and Exchange Commission (SEC). The SEC mandates that companies file paperwork if they choose to go private, but can avoid the extra efforts if they have fewer than 300 shareholders. Consequently, small companies often issue large reverse stock splits to reduce their number of shareholders and pay off the remaining shareholders holding less than that amount with cash compensation.
Fortunately, many institutional investors avoid these stocks due to the lack of liquidity and risk associated with these deals. However, small shareholders can often net a handsome profit from the strategy.
For example, let's say company XYZ issued a 600:1 reverse stock split and then repurchased its shares at $5. Incredibly, shares traded at $4.24, well below the repurchase price after the stock split. This occurred despite the plan to privatize, which was being considered as a result of the stock's lack of liquidity and the fact that it wasn't covered heavily by any institutions. Not many individual investors would turn down nearly 18 percent gainsin a matter of weeks!
Shareholders may also find other opportunities in obscure payoffs offered in privatization deals. Sometimes, companies will offer rights offerings, warrants, bonds, convertible securities or preferred stock to entice shareholders to tender their shares in a move to privatize. Unfortunately, many of these offers are restricted to larger shareholders who are able to bargain more effectively.
Finding Opportunities
All significant corporate events must be recorded in filings with the SEC. As a result, investors can quickly find delisting opportunities in SEC filings that are publicly available through SEC's EDGAR database.
Delistings are found in three types of SEC filings:
- 8-K Current Events - 8-K filings tell investors when and why the company is delisting and are often the first public notification of such intent. This includes the initial announcements of stock splits, which may be a precursor to privatization in smaller companies.
- Schedule 14A Proxy Statements - Proxy statements enable shareholders to vote on whether to go through with delisting (if it is voluntary). This usually occurs during a going-private transaction and may also be the first public notification of such intent.
- S-1/F-1 Registration Statements - These filings detail any new securities being issued as a result of delisting, which may include preferred stock, bonds, warrants or securities in the private company being formed as a result.
The Bottom Line
In the end, delistings can provide profitable investment opportunities or lose major money for shareholders. Everything depends on the motivations behind the privatization, the size of the company and terms of the offer. Investors willing to invest the time and effort to find and research opportunities may uncover some gems for their portfolios that can perform extremely well in the short term.
FAQs
If a company is delisted, you are still a shareholder, to the extent of a number of shares held. And yet, you cannot sell those shares on any exchange. However, you can sell it on the over-the-counter market. This means you can look for a buyer outside the stock exchange.
What happens to my money if a stock is delisted? ›
What Happens to Shares When a Stock is Delisted? If a stock is delisted, shares may continue to trade over-the-counter on the OTC bulletin board (or possibly on an overseas market). Shareholders can still trade the stock, though it is likely that the market will be less liquid.
What are the benefits of delisting? ›
Advantages
- Delisted firms do not have to publish its annual reports. ...
- Private companies are not subject to a minimum listing limit anymore.
- Business cut expenses—listing fee and annual trading costs.
- Private firms are less prone to hostile takeovers.
- Private firms are exempt from market speculation.
Delisting occurs when a stock that is listed and trades on a major exchange like the NYSE or Nasdaq stops being listed and traded on that exchange. In some cases, this occurs because the exchange forces a company to delist, while in other cases, the choice to delist comes from the company itself.
How do I claim capital loss on delisted shares? ›
The delisting of shares results in the impossible selling of shares until the company goes through the exit route. It is effectively irrecoverable and is a loss to the taxpayer. Once the company goes through liquidation or is referred to NCLT under IBC, NCLT declares the company to drop the shares and claim the loss.
What happens if you don't sell a delisted stock? ›
Shareholders retain their legal rights and equity interest in a delisted stock even if they cannot sell their stake as readily as previously.
Do shorts have to cover before delisting? ›
If you short a stock and it then rises in price to the point where the losses exceed the liquidation value of your trading account, you will receive a margin call. At this point, you must deposit more collateral to cover the position. If you don't, the position will be closed and your balance wiped out.
How long does the delisting process take? ›
Companies have 10 days on the New York Stock Exchange (NYSE) to respond to a notification letter from the exchange. Failure to respond can result in delisting procedures which is on a case by case basis but can range from one to seven months.
How low can a stock go before being delisted? ›
How to Stay Listed. Listing requirements vary from one exchange to the next. For example, on the New York Stock Exchange (NYSE), if a security's price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.
Is a delisted stock worthless? ›
Once a stock is delisted, stockholders still own the stock. However, a delisted stock often experiences significant or total devaluation. Therefore, even though a stockholder may still technically own the stock, they will likely experience a significant reduction in ownership.
In the case of Involuntary Delisting
In this situation, promoters will have to buy back the shares at the value predetermined by an evaluator. In case of Involuntary Delisting, your ownership of the shares is not affected, however, the value of your shares might get devalued after delisting.
Is delisting shares good or bad? ›
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.
How do I sell shares in a delisted company? ›
Delisted shares cannot be traded on the stock exchange, to sell these shares one needs to trade them in the over-the-counter market. With Stocx, you can sell or liquidate your shares anytime you please. There are a lot of investors in Stocx that want to invest in various companies.
How do I participate in delisting? ›
What is the process for voluntary delisting?
- A resolution has to be passed in the board meeting for delisting the shares with prior intimation to the stock exchange. ...
- An application for in-principle approval must be made to the stock exchange with details of shares to be delisted and the capital statement.
According to data acquired by Finbold, a total of 179 companies have been delisted from the major United States exchanges between 2020 and 2021. In 2021, the number of companies on Nasdaq and the New York Stock Exchange (NYSE) stands at 6,000, dropping 2.89% from last year's figure of 6,179.
What is the income tax on unlisted shares? ›
Since the unlisted share is a long-term capital asset, the gains would be taxed at the rate of 20 per cent with the benefits of indexation.
How do I report a delisted stock? ›
Report the valueless stock in either Part I or Part II of Form 8949, depending on whether it was a short-term or long-term holding. If an asset became worthless during the tax year, it is treated as though it were sold on the last day of the year.
How do you calculate capital gains loss on shares? ›
Generally, to use the 'other' method, you simply subtract your cost base (what the asset cost you) from your capital proceeds (how much you sold it for). The amount of proceeds left is your capital gain.
Can delisted shares be written off? ›
Even if the shares are delisted from stock exchanges, they are still lying in your demat account as delisting cannot amount to the extinguishment of the shares or your rights in the shares.
What happens if a stock goes to zero? ›
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
A short seller, who profits by buying the shares to cover her short position at lower prices than the selling prices, can drive the price of a stock lower by selling short a larger number of shares.
What happens when delisting fails? ›
Here's what happens when a stock is delisted. A company receives a warning from an exchange for being out of compliance. That warning comes with a deadline, and if the company has not remedied the issue by then, it is removed from the exchange and instead trades over the counter (OTC), meaning through a dealer network.
How long can shorts keep a stock down? ›
There is no mandated limit to how long a short position may be held. Short selling involves having a broker who is willing to loan stock with the understanding that they are going to be sold on the open market and replaced at a later date.
How fast can a stock be delisted? ›
Issues will remain on this list until the first business day after the issue is delisted. An issue is delisted 10 calendar days from the date the Form 25, Notification of Removal from Listing and/or Registration, is filed with the Securities and Exchange Commission.
How long can a stock be under $1? ›
If a company trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, Nasdaq will send a deficiency notice to the company, advising that it has been afforded a "compliance period" of 180 calendar days to regain compliance with the applicable requirements.
Can a stock come back from zero? ›
Stocks are able to lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, in reality shareholders often do receive some residual payment back, but this is usually just pennies on the dollar.
Can a stock go below 1 cent? ›
These types of riskier trades and some other derivatives can lose traders much more than the initial purchase price of shares as in the case of a buy-and-hold investor. So to recap, stocks can only go to zero. They can't go into negative numbers, and they rarely get all the way to zero in the first place.
Can I show share loss in income tax? ›
Capital losses incurred from the sale of shares or mutual funds cannot be reported against the head salary income. Gains or losses made from stock market investments are categorised under the Income Tax Rules as capital gains/losses, business income/loss, and speculative income/loss.
Can you write off stock losses on your taxes? ›
You can't simply write off losses because the stock is worth less than when you bought it. You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year.
What are the tax implications of delisting shares? ›
If delisting happens after one year of share purchase, a capital gains tax of 10% is payable if gains exceed Rs. 1 lakh and if gains are under Rs. 1 lakh, no capital gains tax is applicable.
Even though the average gains for first-day IPOs look exciting, it's important to note that nearly a third of all IPOs decrease in value on day one of trading. This means the stock trades lower than its offer price before the market closes.
What is the minimum stock price for NYSE? ›
Initial Minimum Bid Price for Stock: The stock must have a minimum initial bid price of $5.00, and must later remain at or above $1.00. This requirement serves as a safeguard against certain market activities associated with low-priced securities, and protects the credibility of the NASDAQ market.
Can I sell my delisted stock on Robinhood? ›
If a stock that you own delists, you'll be able to sell it in the market, but you won't be able to purchase additional shares. Once a stock delists, the in-app market data will no longer reflect the current trading price.
Why is Weber stock dropping? ›
The stock has dropped 53% in 2022. Weber withdrew its fiscal-year guidance in late July and said it expects fiscal third-quarter sales to be lower than analysts' estimates. The company cited rising inflation, supply-chain problems, and geopolitical uncertainty as reasons.
Why do companies buy back their own stock? ›
Repurchases return cash to shareholders who want to exit the investment. With a buyback, the company can increase earnings per share, all else equal. The same earnings pie cut into fewer slices is worth a greater share of the earnings.
Does the stock market double every 10 years? ›
How long has it historically taken a stock investment to double? NYU business professor Aswath Damodaran has done the math. According to his math, since 1949 S&P 500 investments have doubled ten times, or an average of about seven years each time.
Do I lose my investment if a stock is delisted? ›
When a company delists, investors still own their shares. However, they'll no longer be able to sell them on the exchange. Instead, they'll have to do so over the ounter (OTC).
What to do with suspended shares? ›
If the suspended company complies with all regulations, the exchange might revoke the suspension, and the shares will start trading again. If the company gets suspended and eventually closes, shareholders will have to write it off as a loss.
Can you write off a delisted stock? ›
To deduct your stock market losses, you have to fill out Form 8949 and Schedule D for your tax return. If you own stock that has become worthless because the company went bankrupt and was liquidated, then you can take a total capital loss on the stock.
How long can a stock be delisted? ›
Companies have 10 days on the New York Stock Exchange (NYSE) to respond to a notification letter from the exchange. Failure to respond can result in delisting procedures which is on a case by case basis but can range from one to seven months.
Stocks delisted from the NYSE and Nasdaq disappear from Robinhood. You don't automatically lose money as an investor, but being delisted carries a stigma and is generally a sign that a company is bankrupt, near-bankrupt, or can't meet the exchange's minimum financial requirements for other reasons.
Can a company force you to sell back shares? ›
As a shareholder you are not required to sell your shares back to the company in a share buyback; the company cannot make you do so; however, companies do offer a premium over the market price of the share to entice investors to sell.
Can you be forced to sell shares? ›
A shareholder cannot typically force another shareholder to sell their shares unless there is a contractual obligation entitling them to do so. For example, if there is a provision enabling such a sale in the company's Articles of Association, Shareholder Agreement or another valid contract.
Can you sell a suspended stock? ›
A trading suspension occurs when the SEC stops trading in a stock to protect investors. That means you can't buy or sell shares in a company whose stock faces trading suspension.
How much stock loss can you write off? ›
If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.
