Whomever can answer this question is a super genius...

This topic does not belong under this "investing" category, but I will answer it here for you anyway.

People buy Ch11 stocks trading a few cents because they think its cheap and some miracle will take place to change something.

There is no logic behind it. Its not "investing" its trading hoping the crap you bought gets bought by somebody else at a higher price.

It happens a lot, GM being a great example, people kept buying that junk, it made many +100% moves in the pennies and ended up being zero.

This is what is left of the original GM stock that went belly up:

There was absolutely no reason for that bounce from 2c to 6c, but hey, somebody thought they were getting a great  deal !

Another reason you see fluctuations like this is because there are big firms or traders with short positions.

These shorts need to cover to close the trade, they will often wait as long as possible to get it as cheaply as possible.

For them, it makes no difference if the stock is at 1c or 5c since they short position is from way higher. Their short covering (they have to buy the stock) may cause spikes like that.

If the company emerges from chapter 11 .. those shares you own during the process will not be converted and you will be asked out.

That stock is only applicable to play the quick moves now, nothing else.

Quote:

Originally Posted by Frank Coolidge 

Thanks for the question and the answers.  I don't understand why you would want to risk capital on something like that.  Your odds are better in Vegas on roulette with black or red.

That would mean you would have to drive or fly all the way to Vegas!

But black or red means 50/50, these Ch11 shares are 100% guaranteed to be worthless.

Back to this thread a little. Why wouldn't we just short the hell out of most stocks for companies that are going bankrupt. Our ultimate goal when we short is hope the stock goes to 0? Thats the most we can make on a short? 100%.

Quote:

Originally Posted by Bostonlude 

Back to this thread a little. Why wouldn't we just short the hell out of most stocks for companies that are going bankrupt. Our ultimate goal when we short is hope the stock goes to 0? Thats the most we can make on a short? 100%.

Yes 100% is the most you can make on a short.

With some rare broker exceptions, you can't short anything under $5 a share. Remember when you sell short, you are borrowing shares from either the broker or another one of their clients. When you start getting down into the pennies, just a few hundred bucks shorts you thousands and thousands of shares which the brokers don't wanna risk not having the shares for you to borrow.

So why not short every bankrupt company? Most of the time you physically can't.

Quote:

Originally Posted by SemperOorah 

With some rare broker exceptions, you can't short anything under $5 a share. Remember when you sell short, you are borrowing shares from either the broker or another one of their clients. When you start getting down into the pennies, just a few hundred bucks shorts you thousands and thousands of shares which the brokers don't wanna risk not having the shares for you to borrow.

 

So why not short every bankrupt company? Most of the time you physically can't.

I disagree with "rare broker exceptions". I can name multiple large brokers with borrows for less than $5 a share stocks, even pennies. (Interactive Brokers, Speedtrader, Suretrader, TradeStation, Think or Swim <- well ToS was better before being bought by TDAmeritrade but anyone with TDA can use ToS so that's a lot of people). Even Etrade, another major broker can short a large list of less than $5 share stocks. I think what you mean by the "you can't short anything under $5 a share" is that you can't short though the platform, you have to call the broker to short pennies or cheap stocks because they are "hard-to-borrow". 

But the reason you can't short bankrupt companies is because the broker doesn't want to hold worthless shares. 

Yea I was trying to make the point that bringing up a list of all the bankrupt stocks and shorting all of them isn't going to be possible.

Thanks for the extra info though.
 

Quote:

Originally Posted by chhansen  

 

But the reason you can't short bankrupt companies is because the broker doesn't want to hold worthless shares. 

Good point. Now the question is the brokerage isn't the one holding the worthless shares. Someone else is? They are borrowing shares from someone who hasnt sold yet!

Does this mean in a situtation like this. Stock for ABC is at $5 and you and a few other people have shorted the stock, just cause you feel like the company will go down .50 or 1.00. And Bam the company said that it's been lying all along like Enron, so the stock is worthless. You know are about to make $5 dollars per share. Does this mean if everyone is cashing out on the way down. The brokerage is actually going to have to pay you out of pocket?

I remember when Worldcom died. I remember after a couple of weeks after it died it settled to under a dollar. I also remember people making quite a bit of money on it when it would fluctuate because the stock would move a little. If the stock is at 0.50 moves to .60 that's 20% and that's the bottom line. Apple has to move quite a bit if you were trying to make 20%. It's safer, but making 20% isn't going to be done quickly.

There's a company called Mitek Systems, Inc. MITK. They used to be worth pennies and were basically bankrupt. At one point were on the Nasdaq got delisted and now they're back there. Then they started to get into check processing with mobile phones. It's still only worth a couple of dollars and it's not an up and comer or anything like that, but they have been able to improve thier stock from delisted and pennies to a couple of dollars and more at times.
 

So what happens when you short a stock going bankrupt, knowing that its going to zero and purposely not cover it?

Quote:

Originally Posted by CsT 

So what happens when you short a stock going bankrupt, knowing that its going to zero and purposely not cover it?

Your broker will initiate a buyin before that happens meaning you have to cover it.