Please help clear confusion on bankruptcy??
 

I need some help in clearing something up in regards to bankruptcy. One way that individuals make profit on bankrupt stock is buy buying it at its already low stock and then selling it when good news is released making anywhere between 10 to 20%. What I am confused about is what happens to the stock if it is reported that the company is moving out of bankruptcy? I was under the impression that the stock would shoot upwards but from this article it sounds that new stock is distributed, hence making the previous stock worthless. The idea being top sell before they emerge?Can someone please clarify this to me?

Any help is appreciated.....


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Re: Please help clear confusion on bankruptcy??
 

the stock is worthless post bankruptcy if new stock is being issues and the old stock cancelled. there are certain situations where a company filed bankruptcy for strategic reasons where the equity will actually emerge with some value...professionals make bets as to how much value and the stocks continue to trade with some real market cap (this was true of some companies with asbestos problems).

True bankruptcies, where the equity is hopelessly under water and obviously going to be wiped out, can trade as you describe. This is because you are not the only person who does not understand how the process works. Its a game of musical chairs for these people, and whoever is holding the stock when the bankrupcy is effective gets wiped out (oftentimes the stock will just trend down over time with sporadic upward volatility in the meantime).

Re: Please help clear confusion on bankruptcy??
 

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is holding the stock when the bankrupcy is effective

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Thank you first of all for your input. My question is as follows.....

You mentioned that the stock is wiped out when the bankruptcy go's in effect. Is this the same as emerging from bankruptcy? In other words say a company X files for bankruptcy but reorganizes and emerges from bankruptcy, would the stock still be wiped out and new stock issued leaving the orginal holders broke?

Re: Please help clear confusion on bankruptcy??
 

Yes. But again, a company can emerge from BK with the old stock cancelled and new stock issues (to other stakeholders, generally the debt holders) OR it can emerge with the old equity intact if there is enough value in the company. This happens when a company has entered Ch 11 for a strategic reason (i.e. to break contracts or negotiate a legal issue). This is not a simple answer. Suffice it to say most sh*tbag companies are zeros. If they are trading at pennies a share in BK, usually the stock will be a zero. If its trading at a couple bucks or more (i know its market cap, guys, but i am trying to keep this simple) its usually generally believed there is enough value to not wipe out the equity.

Hopelessly overindebted companies will wipe out the equity. Companies with legal and other issues sometimes retain value for the equity holders.

Re: Please help clear confusion on bankruptcy??
 

Usually you can tell if the stock will be cancelled by comparing the debt to the book value. Most bk's owe more than they're worth, e.g. less than worthless. Another indicator is the bonds. The bondholders are ahead of the stockholders as far as getting anything. If the bonds are trading close to face value, the stockholders may get something. If they are trading at 30 cents on the dollar, forget it.

Some notable stocks that got cancelled, leaving many surprised bagholders, are Kmart, United Airlines, and Delta (not sure they're done yet). Every once in awhile something weird happens. GM parts supplier Delphi was circling the drain and looked certain to being flushed. Then hedge fund BSD David Tepper came in and bought a ton of it. It's looking like he may save it. I'm glad I covered my short when I did.

Re: Please help clear confusion on bankruptcy??
 

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Usually you can tell if the stock will be cancelled by comparing the debt to the book value. Most bk's owe more than they're worth, e.g. less than worthless. Another indicator is the bonds. The bondholders are ahead of the stockholders as far as getting anything. If the bonds are trading close to face value, the stockholders may get something. If they are trading at 30 cents on the dollar, forget it.

Some notable stocks that got cancelled, leaving many surprised bagholders, are Kmart, United Airlines, and Delta (not sure they're done yet). Every once in awhile something weird happens. GM parts supplier Delphi was circling the drain and looked certain to being flushed. Then hedge fund BSD David Tepper came in and bought a ton of it. It's looking like he may save it. I'm glad I covered my short when I did.

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Very good point on the bonds. Very bad point on book value.