Trying to understand what happens when a company goes in and out of bankruptcy. I'll use American Airlines as an example because it's what I've been following for some years.

In November 2011, AA announced its bankruptcy; its stock, which was sliding, dropped to 0.38. It stayed flat during 2012, and now that a merger deal has been approved, it climbed up to almost 12.

During 2012 I thought of buying some AA stock because it was so damn cheap. If I had, I could be selling it today for a nice 32x profit. But at the time I was adviced not to - I was told because the company was bankrupt, its stock was just for speculators, pump and dump schemes, and so on, and it would become worthless when the company merged (it would be delisted and a new one added).

So when I read that the merger was approved, I expected it to drop to near zero. Instead, it climbed sharply.

Can anyone explain what's going on? If I had bought in 2012, what would have been the risk to offset this fantastic 32x reward? What will actually happen to AA stock once it exits bankruptcy? It sounds too good to be true, so it probably is, but I can't see why. What am I missing? Why didn't everyone buy AA during 2012?


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