During the COVID outbreak last spring, oil made headlines as the monthly futures contracts saw such little demand that prices actually went negative. This situation didn’t mean that every oil change came with a free envelope of cash, but the May 2020 NYMEX West Texas Intermediate (WTI) futures contract fell to a price of -$37 as storage ran out and contract holders had nowhere to put any product.
The May 2020 event marked the first time the WTI futures contracts had gone negative, so could something similar happen to stocks some day? The short answer is no, stocks of publicly traded companies can never go below 0. But that doesn’t mean an investor can only lose their principal when buying stocks, especially when leverage is applied.
Who Maintains Stock Prices?
Stock prices aren’t maintained by a government body or financial council. The price of each individual stock is controlled by the millions of investors who buy and sell securities on public exchanges. Share prices rise when buyers outnumber sellers and the increased demand pushes up the cost investors are willing to pay. On the flip side, share prices decline when more sellers are present than buyers and unloading the stock becomes difficult.
Brokers like TD Ameritrade and Robinhood (NASDAQ: HOOD) facilitate stock trading by matching these buyers and sellers at a price acceptable to both parties. The buyer of the stock will always pay a little more than the seller receives — this difference is the spread paid to the broker. But share prices are affected by investors, whether large institutions, governments or individuals. Multiple parties working toward different goals cause the constant fluctuation of stock prices.
Can a Stock Be Delisted?
Trading on a public exchange like the Nasdaq or NYSE requires companies to maintain certain standards and practices. For example, to be listed on the NYSE, a company must have more than 1.1 million shares in circulation with a minimum market cap of $400 million (which puts the minimum share price around $4). The Nasdaq requires 1.25 million shares outstanding with a minimum share price of $1.
In addition to other regulatory and security requirements, shares must maintain these minimums in order to remain listed on the public exchange. Stocks are delisted frequently from major exchanges because their share price drops below the required minimum. Of course, shares aren’t just dropped from exchanges without notice. In most situations, the NYSE or other major exchange will issue a warning saying that a stock whose share price has fallen under the minimum has 30 days to reclaim that level or be delisted. At this stage, many companies choose a reverse stock split (combining outstanding shares in order to raise the stock price) in order to maintain the price minimum.
If the stock fails to reclaim the minimum price level after the 30-day period, it will be delisted from the exchange. Delisting doesn’t mean the stock goes to 0 or the company goes bankrupt. But removal from the major exchanges means that the company must now trade “over the counter” (OTC). OTC stocks are often troubled companies with accounting concerns — after all, no one wants to trade on the OTC exchanges. While some stocks like the Chinese firm Tencent (OTCBB: TCEHY) do just fine trading off the major exchanges, the goal of most publicly-traded firms is to be listed on the NYSE, Nasdaq, and the like.
Can a Stock Go Negative?
Stock prices can technically go to 0, but they can never go negative. In fact, you likely will never encounter a stock that goes to 0 since the exchange will yank it once it spends too long below the minimum price requirement. Investors usually won’t allow their stock purchases to go all the way to 0 anyway — they’ll sell once the bad news hits and move on.
In the case of a company like Lehman Bros, a major bankruptcy can result in shareholders being completely wiped out of their original investment. If you put $10,000 into a stock at $20 per share and it declares bankruptcy and shares fall to $0, you will lose all of your initial $10,000 but no more. As long as you aren’t shorting or borrowing money to buy shares, you can never lose more than your original investment amount.
Can Share Prices Go Negative?
Here are a few caveats to the declaration that stocks can only fall to 0, but no further. An investor cannot lose more than their original investment provided they purchased stocks with non-borrowed money and aren’t using derivatives like options or futures contracts. As we saw in the example above, the May 2020 WTI futures contract did go negative, so not all investment instruments have a floor of 0.
Stock prices cannot fall below 0, but the expected value of a company can be negative and an investor’s account balance can fall into the red as well. Here are examples of both:
Stock Price vs. Enterprise Value
If a publicly-traded company has more liabilities (i.e., debt) than cash and assets, the price of its shares won’t be negative, but the value of the company (known as enterprise value) can certainly be negative. A negative enterprise value could put downward pressure on its stock price and eventually result in bankruptcy, but investors will never lose more than their original investment. However, company executives may owe more than the value of their shares to creditors should the enterprise face solvency concerns.
Derivatives and Leverage
A buy-and-hold investor will never lose more than their principal in stocks, but many investors and traders use instruments like derivatives or apply leverage to increase profits. Option writers can lose more than the premium they receive for selling the option if the stock makes a strong move in the other direction. This potential scenario is why options permission must be granted at most brokers and level of experience is taken into account.
Additionally, an investor who trades on margin (i.e., borrowed money) can lose more than their principal if the stocks they buy decline and the broker issues a margin call. For example, if a trader buys $2,000 worth of stock with their own cash and another $2,000 on margin, any decline of more than 50% will result in a loss exceeding the original $2,000. Shorting also works in the same manner since shares are borrowed from the broker. If shares are shorted at $10 per share and the stock rises to $25, the short seller must rebuy the shares for more than they originally paid to borrow them.
Benzinga’s Best Online Stock Brokers
Investors have never seen a better time to open a brokerage account. With most commissions sitting at 0 and partial shares available at many brokers, a diversified portfolio can be constructed cheaply and efficiently. Here is a list of Benzinga’s favorite online brokers for stock traders.
Unless Leverage is Applied, Investors Cannot Lose More Than Their Principal
Stock prices can fluctuate rapidly, and non-diversified investors run the risk of losing all the capital should their stocks run into liquidity or legal issues. And if you’re shorting, levering up or using derivatives, you can definitely lose more than your principal if you aren’t carefully constructing your trades.
But buy-and-hold investors have little to fear when it comes to owing money on stocks. If you buy 100 shares of stock and sit on them, you cannot lose more than your original investment, even if the company goes bankrupt and share prices crash to 0. That’s one of the benefits of a simple buy-and-hold strategy — you know exactly how much you stand to lose should your investment turn against you.
Frequently Asked Questions
Can you owe money from stocks?
Yes, you can owe money from investing, but not if you simply buy and hold shares. Risk increases when leverage and derivatives are used because borrowed money must be returned. Selling options can result in a negative account balance should your trade turn south. Borrowing money to buy stocks could also result in a loss of more than your principal if your investment declines below the maintenance margin requirement and your broker issues a margin call.
Can you lose all your money in the stock market?
Yes, even with a simple buy-and-hold strategy, you can technically lose all your money in stocks if the shares you purchase drop to 0. If you buy $1,000 worth of XYZ stock and the company has questionable accounting or untrustworthy leadership or even just bad luck, your $1,000 could completely evaporate if the firm declares bankruptcy and shares drop to 0. But unless you have borrowed money or utilized derivatives, you cannot lose more than the initial $1,000 you put in. You can definitely lose all your money in the stock market, but you can still walk away debt free if you aren’t using margin, options or short sales.