It usually takes a bankruptcy to force a company's stock to zero.
Stocks that ultimately fall to zero generally follow a fairly predictable path. Usually, a stock will begin trading down in value as the underlying company experiences financial difficulty and may be on the verge of bankruptcy. If and when bankruptcy is declared, the company's stock will leave the major exchanges and trade between speculators. Ultimately, the stock will be rendered worthless and will become merely a souvenir. Even in this event, the stock can still usually be sold for tax loss purposes.
Causes
Stocks rise and fall based on the financial performance of the underlying company and other market factors. While many stocks may trade into the single digits, it is fairly rare for a stock to fall to zero. Usually, a stock will only reach zero due to the bankruptcy or other dissolution of the parent company. Even when a company declares bankruptcy, the stock will not immediately fall to zero. Usually, speculators keep trading the stock in the hope that somehow the company may survive. However, stock in bankrupt companies is almost always ultimately rendered worthless.
Delisting
Once a company drops enough in price, its total market value may not be sufficient to meet the listing requirements of major exchanges, such as the New York Stock Exchange. The exchanges have explicit rules about the size of companies that are allowed to be listed on the exchange, and bankrupt companies usually make a quick exit. Once they no longer meet listing requirements, the company loses the rights to the stock symbol, which may be recycled to a new company.
Over-the-Counter Market
Once stocks are delisted from the major markets, they trade in the over-the-counter market, also known as the "pink sheets." Over-the-counter trading is not regulated like exchange trading is, and stock prices can be volatile as speculators try to make quick money trading on rumors and optimistic hopes. For a company in bankruptcy proceedings, its old shares will trade with a new five-character stock symbol that ends with the letter "V," which indicates that they are the old shares.
Reorganization of Bankrupt Companies
Most companies that file for bankruptcy do not liquidate but rather reorganize. Unfortunately for shareholders, no matter what type of bankruptcy a company files, the original shares are generally canceled and rendered worthless, either after the distribution of assets or once the company reorganizes. Under reorganization, the company will issue new shares, and existing shareholders generally receive nothing, unless they purchase shares of the new stock.
Tax Loss Sales
Eventually, even the over-the-counter market stops trading the shares of a bankrupt company, leaving investors who did not sell with no market for their stock. This could pose a dilemma, because you can only claim a tax loss on a stock if you make an actual sale. However, most financial services firms will agree to buy your stock from you for one cent if you sign a letter acknowledging that you cannot find any market for your stock and that you relinquish any rights to the stock position. This way, you can claim the loss on your taxes and use it to offset any gains you may have.
