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Beware of Delisted Stocks
Companies that are delisted face hard times: few rebound, and many languish for years or even disappear. That is because liquidity dries up and trading costs climb - sometimes doubling. Additionally, these stocks are subject to market manipulation.
The result is that the stock price of delisted companies falls an average of 55% when they begin trading after being delisted, according to a study of the NASDAQ reviewing delistings between 1978 and 1995.
The delisting process on the NASDAQ begins when a stock's bid price falls below $1 for 30 consecutive trading days. Alternatively, a company may fall below minimum capital requirements. The NYSE requires companies to have a market capitalization of at least $50 million and shareholder equity of at least $50 million.
This year through March, the NASDAQ delisted 87 companies, compared with 29 for the same period in 2000. Many more may result. As of March 8th, there were 199 companies trading on the NASDAQ for less than $1 over the past 20 to 30 days, including once highflying Theglobe.com and EMusic.com. Drkoop.com already has been notified of the possibility of delisting; it is contesting the proposed action.
One option sometimes employed is for a company to do a reverse split. However, that often fails. According to a study of 76 companies doing reverse splits between 1976 and 1991, 20 companies went out of business within three years. The remaining companies under performed the market by an average of 33% over the same three-year period.
Source: Wall Street Journal, March 20, 2001
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
All content Copyright © 2008 Advocate Capital Management, Inc. except where noted. All rights reserved.
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