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De-listings are one of the worst things that can happen to an investor. The bad news is that they are fairly common, but the good news is that there is usually substantial warning when a delisting is coming.
The most popular and well-known publicly traded companies trade on an exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. Those companies that trade on the exchange are known as “listed companies,” simply because they’re on the list of companies that are allowed to trade on the exchange. In this way, being listed on the exchange is much like being on the list for an exclusive nightclub.
Just as a VIP would never want to be seen without his or her name on the list, publicly-traded companies do not want to be off the exchange’s list. However, exchanges can and do delist companies who fail to meet the criteria for a listed stock on their exchange.
Causes of De-listings
Those criteria cover a number of facets of the company’s value, price, operations, and equity limits. Perhaps the most common cause of delisting is that a stock is too cheap. The NYSE will de-list any company whose stock’s bid price has fallen below $1 for 30 business days in a row. In other words, if a company’s stock price falls below $1, it has about a month and a half for its stock price to rise above that threshold. For this reason, any stock that falls below $1 becomes excessively risky.
This low-price threshold exists because stocks at this price range–especially the infamous “penny stocks”–can be easily manipulated and will swing tremendously in price in one day, regardless of the fundamental value of the company.
There are other causes of de-listings that are just as troubling. If the company’s market capitalization falls too low, or if too small a portion of the company is being publicly traded, the exchange can delist the company if it does not fix the problem.
Likewise, companies that fail to earn a minimum amount of revenue can be delisted, although there is usually not a minimum amount of profit required, since several public companies operate at a loss, sometimes for several years. This is less of a worry for the exchange than a drop in revenue, since it is generally harder to recover revenue than it is to increase profits on existing sales.
Finally, exchanges will delist a company if they have reason to believe that fraud or some other malfeasance has taken place and the company should not have qualified for a listing in the first place. This is particularly common with accounting scandals.
De-Listings and Stock Prices
While a delisting is one of the worst things that can happen to a stock, it usually doesn’t affect stock price as drastically as you might expect. That’s because a delisting will usually occur only after the damage has been done. If, for example, the stock price has already fallen, delisting may not make much of an impact, or if an exchange delists a company because of fraud, this will usually happen long after the market has bid down the company’s stock price after news of the fraud spreads to the public.
Exchange Rules on De-Listings
Each exchange lists rules for listing requirements and causes for delisting in the listing manual. For NYSE, Section 801-809 cover all rules of a delisting. While this information is interesting, investors may not find it particularly useful when choosing which securities to pick and avoid.
However, a general knowledge of the listing requirements for an exchange can give investors a good sense of what kinds of companies reside on that particular exchange and what fundamental data is most important when evaluating the worth of a firm.