The stock market can be a wild ride, and no one knows this better than investors of electric vehicle maker Nikola Corp (NKLA). The companys stock, once valued at $67 per share, has plummeted in value and now hovers below $1.
The question on the minds of many investors now is: what happens when a companys stock falls to zero?
Its happened before. Enron and Lehman Brothers stocks fell precipitously to or close to zero before being delisted by their exchanges. More recently, it happened to Silicon Valley Banks parent SVB Financial Group and Bed Bath & Beyond (BBBY), whose stock fell to 71 cents and 28 cents, respectively, before trading was suspended.
Here is a guide to why stocks may plummet to zero and what it means for investors.
Have you ever wondered why you can almost always buy shares of popular companies like Apple or Amazon? No matter how many investors are buying the stock never seems to disappear completely. It’s kinda confusing right? I mean, shouldn’t companies eventually run out of shares to sell?
This question bugged me for years before I finally understood how the stock market really works. Today, I’m gonna break down this mystery in simple terms so you can understand exactly what happens when you click that “buy” button on your trading app.
The Basic Truth: Yes, Companies CAN Run Out of Shares (Sort Of)
Let me start by answering the main question directly Yes, a company technically can run out of shares available for purchase – but it’s not as simple as emptying a shelf at a store
When we talk about companies running out of shares, we’re actually dealing with two different scenarios:
- The float becoming extremely limited
- All authorized shares being issued
Let’s dive deeper into what these actually mean in real-world terms.
Understanding the Secondary Market: You’re (Probably) Not Buying From the Company
The biggest misconception people have is thinking they’re buying shares directly from the company. In most cases, you’re not!
When you buy stocks through your broker, you’re participating in what’s called the secondary market. This means you’re buying shares from other investors who already own them – not from the company itself.
Think of it like buying a used car. The manufacturer (Ford, Toyota, etc.) doesn’t get any money from that transaction. They already got paid when the car was first sold. Similarly, companies only receive money when shares are initially issued.
So who exactly are you buying from? Here’s the breakdown:
- Other individual investors who are selling their shares
- Institutional investors like pension funds or mutual funds
- Market makers who facilitate trading by maintaining inventory of shares
- High-frequency traders who may hold shares very briefly
That’s why stocks don’t just “run out” – because there’s a constantly changing pool of owners willing to sell at various prices.
The Float: The Real Measure of Available Shares
What really matters isn’t the total number of shares a company has issued, but what’s called the float.
The float refers to shares that are actually available for public trading. It excludes:
- Shares held by company insiders (executives, board members)
- Shares held in reserve by the company
- Restricted shares that can’t be traded yet
For example, a company might have issued 100 million shares total, but if 60 million are locked up by insiders and institutional investors who don’t trade frequently, then the float is only 40 million shares.
A small float can indeed create situations where shares become hard to buy, especially if demand suddenly increases. This is why you sometimes see dramatic price movements in smaller companies – there simply aren’t enough shares available to meet sudden demand without the price shooting up.
Can the Float Actually Reach Zero?
In extremely rare circumstances, the float can get squeezed to near-zero levels. The most famous recent example was GameStop in early 2021.
What happened:
- Large institutional investors had shorted more shares than were actually available in the float
- When retail investors started buying en masse, there weren’t enough shares available
- This created a “short squeeze” where prices skyrocketed
But even in this extreme case, shares were still available – just at much higher prices than before. The market’s price mechanism ensured that some shareholders would eventually be willing to sell if the price got high enough.
Authorized vs. Issued Shares: The Company’s Perspective
From the company’s viewpoint, there are two important numbers:
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Authorized shares: The maximum number of shares a company is legally allowed to issue (set in its corporate charter)
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Issued shares: How many shares the company has actually created and distributed
Yes, a company CAN reach its authorized share limit. When this happens, the company has several options:
- Do nothing and continue operating with the existing shares outstanding
- Amend their corporate charter to authorize more shares (requires shareholder approval)
- Conduct a stock split to increase the number of shares without changing ownership percentages
- Repurchase shares from the open market to create treasury stock they can reissue later
When Companies DO Sell New Shares: Primary Market Transactions
There are specific situations when you might actually be buying newly created shares directly from the company:
Initial Public Offerings (IPOs)
When a company first goes public, they’re selling newly issued shares to investors through investment banks. This is a primary market transaction where the money goes directly to the company.
Secondary Offerings
After being public, companies sometimes issue additional shares to raise more capital. These include:
- Follow-on offerings: New shares issued after the IPO
- Rights issues: Offering existing shareholders the right to buy new shares, usually at a discount
- Private placements: Selling shares directly to specific investors rather than the public market
Direct Stock Purchase Plans (DSPPs)
Some companies offer programs where individuals can buy shares directly from the company, bypassing brokers. Companies like Home Depot, Coca-Cola, and many others offer these plans.
Real-World Examples of Companies “Running Out” of Shares
While complete unavailability is rare, here are some instances where share availability became severely constrained:
Volkswagen (2008)
In 2008, Volkswagen briefly became the most valuable company in the world during an epic short squeeze. Porsche had secretly acquired nearly 75% of VW’s voting shares, while another 20% was held by the German government. This left a tiny float that short sellers desperately needed to cover their positions, sending the price from €200 to over €1,000 in days.
Tilray (2018)
Cannabis company Tilray had a very small float when public interest in marijuana stocks surged. With few shares available for trading, the price rose 1,400% after its IPO before crashing back down.
Tesla (Pre-S&P 500 Inclusion)
Before Tesla was added to the S&P 500 index, demand for shares rose dramatically as everyone anticipated the inclusion. While shares remained available, the price increased significantly due to limited supply relative to demand.
Why You Can (Almost) Always Buy a Stock
Despite these examples, there are several mechanisms that ensure you can almost always buy shares of a public company:
1. Price Discovery
The most fundamental mechanism is price. If demand exceeds supply, the price rises until some existing shareholders decide to sell. There’s always a price at which someone is willing to part with their shares.
2. Market Makers
Market makers are professional traders who commit to providing liquidity by always standing ready to buy and sell specific stocks. They maintain an inventory of shares and continuously quote both buy and sell prices.
3. Short Selling
Even if all actual shares are held by long-term investors who refuse to sell, short sellers can create “synthetic” supply by borrowing shares and selling them. This adds liquidity, although it can create problems if taken to extremes.
4. Stock Splits and New Issuances
Companies that see their share price rise too high (making it difficult for smaller investors to buy) often split their stock to increase the number of shares. Apple and Tesla have done this multiple times.
What This Means for You as an Investor
Understanding how share availability works has several practical implications:
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Liquidity matters: Stocks with larger floats generally have less price volatility and smaller bid-ask spreads, making them easier and cheaper to trade.
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Small floats = higher volatility: Companies with small floats can experience wild price swings with relatively small amounts of buying or selling pressure.
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Dilution risk: When companies issue new shares, it dilutes existing shareholders’ ownership percentage. This is why many investors watch authorized vs. outstanding shares.
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Short interest is important: Stocks with high short interest relative to their float are candidates for short squeezes if positive news emerges.
So Can a Company REALLY Run Out of Shares?
Let’s put it all together:
- Technically yes, a company can issue all its authorized shares, reaching its legal limit
- Practically speaking, shares are almost always available on the secondary market at some price
- In extremely rare cases, the float can become so constrained that shares become very difficult to acquire at reasonable prices
The beauty of the market is that it’s self-adjusting through price. As shares become scarcer, prices rise, which eventually attracts sellers into the market.
Final Thoughts
Next time you hit that buy button on your trading app, remember you’re probably buying from another investor, not the company itself. The stock market is essentially a massive secondhand marketplace for ownership stakes in businesses.
And while companies can theoretically “run out” of authorized shares, the secondary market ensures that shares are almost always available – if you’re willing to pay the current price.
When a Stock Hits Rock-Bottom
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders.
“A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
On rare occasions, a stock’s value could fall to zero due to regulatory freezes imposed on a company for illegal activity or regulation breaches.
A company’s stock may lose all its value for a variety of other reasons, such as poor management, weak financial performance, corporate fraud, or external factors such as economic downturns or industry disruption.
A publicly-traded company exhibits several signs of distress well in advance of declaring bankruptcy. Some of these signs include “over-leveraged balance sheets, erratic share price trading and lots of insider sales, that is, management getting out,” says Sissons.
Significant and persistent declines in profit and revenue, negative auditor reports and debt rating agency comments are also key red flags, “although, on these latter two groups, there are many instances in which they failed to capture the obvious data,” he warns.
Making Profits from Sinking Stocks
Is there an opportunity for investors to make money when a stock price goes south? According to Sissons: yes. “You can buy the bonds, which are likely trading at a discount,” he says. “If the firm is capitalised as 50% debt and 50% equity, then the value of equity drops to zero, so the [holders of] 50% debt control the firm and convert [the debt] to equity. The company then becomes debt-free in effect.”
Alternatively, investors can buy puts or short the company.
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company trades again.
“Some upside can be re-captured at that time”, says Sissons, but adds, “on balance, the equity investment is typically completely lost.”
Can a company run out of shares?
FAQ
Do companies have unlimited shares?
Typically a startup company has 10,000,000 authorized shares of Common Stock, but as the company grows, it may increase the total number of shares as it issues shares to investors and employees. The number also changes often, which makes it hard to get an exact count.
Who owns 90% of the stock market today?
Can a stock recover from a 50% loss?
Losses are harder to recover than they look on paper: A stock that falls 50% has to double just to get you back to even. A 75% drop? That requires a 300% rebound.
What is the 7% rule in stocks?
The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.