From: pejasani@SDRC.COM (the H-man)
Newsgroups: misc.invest
Subject: Re: Question on Selling Short
Date: 15 Aug 92 02:48:36 GMT
Reply-To: hitesh.jasani@sdrc.com
Organization: SDRC - Structural Dynamics Research Corp


In article <1426500238@igc.org>, mcaldon@igc.org (McAldon International Inc.)
 writes:
|>
|>
|>|  What happens when you short sell a stock and the company goes bankrupt?
|>|  Bob                                     Seattle, Washington
|>
|>Many bankrupt stocks trade, including on NYSE.  In such cases, you


You're thinking of companies that have filed chapter 11 for protection from
their creditors while they reorganize.  It's a different story with chatper 13
liquidation.


|>would cover your short position and pocket the profit.  If you're
|>talking about a company that's gone out of business entirely and
|>no longer is quoted, the situation becomes interesting.  I suppose
|>you could keep your "position" open forever, so you wouldn't have


It's my understanding that the stock price and book value of companies forced
into liquidation by their creditors goes to zero.  The book value of the stock
(the equity in the company) goes to zero because the company has a negative net
worth - why else would the creditors force a liquidation.  At this point the
stock price goes to zero, since the book value of the stock is zero and there
is no possibility of future appreciation - the company will cease to exist.

In this situation, according to an old finance prof, the liquidation causes a
closing of your position without you having to purchase any stock.  You keep
the money received when you sold short minus the finance charges your broker
extorted for the loan and walk away well off.  Kind of like hitting the lottery.


|>to pay tax on your presumed profits.  Just guessing; this hasn't
|>happened to me.  I don't know what would happen if somebody new
|>bought the bankrupt outfit and revived it so that the stock started
|>trading again and skyrocketed.  A publicly owned bankrupt company
|>has value because a purchaser might not have to go through the 
|>expensive process of going public.  DMcKenzie
|>                           
|>|                        |     "Nobody ever went broke from     |    
|>|    mcaldon@igc.org     |   underestimating the intelligence   |
|>|                        | of the American public."  HL Mencken |
|>|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|>


Just my $0.02 worth.

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