What Is a Stock Liquidation?

While some stock liquidations are a negative event, others may translate into a big profit.

While some stock liquidations are a negative event, others may translate into a big profit.

"Stock liquidation" can have a number of different meanings -- but the common theme is that the stock is sold in exchange for money. Corporate stock as a whole can be liquidated if a company files bankruptcy, or if a company is bought out or taken over. If you buy stocks on margin, your firm can liquidate your stocks if the equity in your account falls too much. As an individual, you can liquidate stock by selling it in your portfolio.

Corporate Bankruptcy

If a company files a Chapter 7 liquidation bankruptcy, the company essentially vanishes from existence. All assets are sold, with the proceeds paid out to creditors. Individual stockholders generally receive nothing in a corporate liquidation. Stock shares trade down sharply in value until they are ultimately "delisted" and removed from the stock exchange. Corporate stock in a liquidation bankruptcy is ultimately worthless, since it represents ownership in a company with no assets that no longer functions as a going concern. A Chapter 11 bankruptcy, as opposed to a Chapter 7 bankruptcy, does not always result in the liquidation of stock, since the company ultimately emerges from bankruptcy after reorganizing its debt. However, even in Chapter 11 bankruptcy, most stocks end up worthless.

Buyout

The best way for a stock to get liquidated, in most investors' eyes, would be when a stock is bought out. A buyout occurs when another entity, usually a corporation, offers to buy all of a company's stock. To induce investors to sell, buyout prices are typically higher, and sometimes substantially higher, than the current market price. All shareholders are entitled to the buyout price, although in some cases an investor must physically submit the stock shares to receive payment. At the conclusion of the buyout process, the target company's stock is delisted.

Margin Call

On an individual basis, your personal stock may be subject to liquidation if you bought it on margin. Margin is the process of borrowing money from a firm to purchase stock or other securities. At the time of your initial purchase, you must meet the initial maintenance requirement of 50 percent equity, meaning if you buy $10,000 in stock you must put up at least $5,000 yourself. If your equity ever falls below the minimum maintenance requirement, which is usually between 25 and 40 percent, your firm will issue a margin call. A margin call means you must immediately sell stock or deposit money into your account, or your firm will liquidate your stock for you.

Stock Sale

Probably the most common form of stock liquidation is one you can initiate yourself. In the parlance of the industry, liquidating a stock is simply selling it. If you call your broker and tell him you want to liquidate a stock you own, he will enter a sell order for you. If you tell him to liquidate your portfolio, he will sell everything you own.

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