Over-the-counter (OTC) stocks listed on the FINRA Bulletin Board or on the Pink Sheets carry substantial risks for traders. The potential bankruptcy of the company is the ultimate risk, and in this regard OTC stocks are no different than their counterparts on the more reputable financial exchanges such as the New York Stock Exchange and the NASDAQ.
In most cases, the shares of a company that goes through the bankruptcy process become worthless. This is the case for both private and publicly traded companies; it does not really matter if they are penny stocks or blue chip securities. It does not matter what type of bankruptcy protection program the company is seeking; it is mostly a matter of how the market will react, and most of the time shareholders will move to dump the stock in a flash at the first mention of insolvency.
What Really Happens to Stocks During Bankruptcy
Listing and quotation systems such as the FINRA Bulletin Board and the OTC Markets Group Pink Sheets actually carry the stocks of bankrupt companies. This is because exchange systems such as the NYSE and NASDAQ have certain rules in place when it comes to handling the shares of companies that file for bankruptcy, which often includes sending them to the OTC markets.
A publicly-traded company that files for bankruptcy does not automatically go through liquidation. A Chapter 11 bankruptcy filing, for example, allows a business enterprise to keep operating while it works out a plan to repay its debt. This, however, does little to assuage the concern of shareholders who will more than likely move to dump the stock. When this happens, stock values plunge dramatically and stocks go through the process of delisting. Investors should also forget about dividends.
OTC stocks can be traded even if the company is in the midst of bankruptcy proceedings, but wise investors know to stay away from these volatile shares. A redemptive strategy in this case is to chalk it up to a loss and declare it as such when it is time to file a tax return. There are, however, speculative investors who scour through SEC filings and the OTC boards looking for bankrupt stocks that they can make a quick profit from, but this is a risk that is not worth taking. Not all companies that go through a debt restructuring period will emerge from bankruptcy, and when this happens their stock is really gone forever.