This whole Worldcom thing got me wondering… besides dropping immensely in value, what else happens to a stockholder’s shares? That person doesn’t lose them do they? Probably a stupid question, but I’m no market whiz. [sub]Unless you count that time in the grocery store…[/sub]
The answer is, that it depends. There are many different kinds of bankrupcies. In some cases, the bankrupcy allows the company to reschedule its debt, in which case it’s possible for the stockholders to regain some value in their shares. In other cases, the company is dissolved and the assets sold to pay off creditors, in which case owners of the common stock are left with pieces of paper which are unsuitable even for wiping one’s tushie.
Thanks Punoqllads.
It helps to think of stockholders as what they really are – owners (albeit owners of a teeny tiny sliver of the company).
Now think of the corner store. The owner has to pay the employees, pay the bills, pay taxes, etc. Whatever is left, the owner gets.
As Punoqllads explained, there are different types of bankruptcy, ranging from a breathing period to reorganize debt all the way to a total liquidition. But the bottom line is, a company doesn’t file bankruptcy until it can’t pay everyone else, which means there’s nothing left for the owners. And that means their stock isn’t worth much.
Wallpaper! 
Not even value as Wallpaper or toilet paper because most investors do not own the physical shares. Most people one the electronic version.
Could it ever become a liability? Could a creditor to a bankrupt company go after the stock owners to retrieve its debts?
I’m serious – I’ve been told that stocks could actually carry a negative value that way. I’m inclined not to believe it, but to be honest, it seems to follow logically.
Usually, no.
As a general simplification, in both private and public Limited Liability companies, the shareholders are not held liable for the company’s debts.
However, some companies are set up in the same way that sole traders are - in other words, “Unlimited Liability” companies. Stockholders in these companies could be pursued by creditors to recover debt.
The vast majority of (probably every single one of) the companies which are listed in the various stock exchanges are Incorporated. Incorporation establishes the company as a legal entity distinct from the owners. In this fashion, any wrongdoing or debt, etc. by the corporation is the responsibility of the corporation, not the owners. Lawsuits are brought against the corporation, not the owners directly.
This limitation of liability is critical to the structure of our stock market, and business in general. Without that limitation, people will not be very interested in business ownership. One slip up by a worker or manager can destroy the owner’s personal wealth, which is far too risky.
Case in point, my father owns a very small auto body shop, he incorporated. That way, if something bad happens, a person would have to sue the company, and cannot lay claim to my father’s possessions or savings. They might sue the company into bankruptcy, forcing it to sell all the company’s assets to pay the judgement, but my father is protected. Without incorporation, his personal savings and possessions could be seized in a lawsuit.
The lowest possible value for a stock is $0, it doesn’t really get any worse than that.
In the UK at least, you can offset your losses in such a company against your next year’s tax liability, so that you can recover 40% of your investment.
Russell
Also, there’s a distinction to made between common and preferred stock; from this site
Preferred Stock:
There is an exception to this. I have to emphasize that actually exercising this exception as regards public companies is exceedingly rare (I can’t think of a single example off the top of my head), so you don’t have to toss and turn tonight thinking that creditors are going to come after you for some dog stock you own.
But. Creditors have the power to chase stockholders for money moved out of a company in the time prior to bankruptcy. Generally, that time is 3 months for the hoi-polloi and up to a year in certain circumstances where fraud is present and insiders benefitted. (Bankruptcy law is complex, IANAL, YMMV, offer not valid in Tennessee, etc.)
So let’s say that you own some Amalgamated Widget stock which pays a dividend of $1.00 per quarter. They pay their scheduled June dividend and then discover that things are bad and file for bankruptcy. Theoretically, the creditors could come after you and ask for their buck back.
Again, this is very rare – for two reasons. One, most companies have discontinued dividends long before filing for Chapter 11, because they are trying to conserve cash and stave off the bankruptcy in the first place. Two, chasing down individual stockholders and asking each of them for (say) $100 bucks costs more than $100. So the creditors don’t bother.
But let’s say that Amalgamated pays an extraordinary dividend of $50/share, leaving the company bereft of money, and you manage to cash the dividend check before the filing. Yeah, the creditors can come after you and if the amount is large enough, they might even give it a go.