What if I maintain a short position in a stock that is delisted and declares bankruptcy?

A:

When you short sell a stock, you borrow the shares, sell them on the market, and then collect the proceeds as cash. If you wanted to get out of the position, you would have to buy back the same number of shares to repay the person (or brokerage) from whom you borrowed them.

Those investors who "go short" provide liquidity to markets and prevent stocks from being bid up to ridiculously high levels on hype and over-optimism.

Short selling follows the “buy low, sell high” principle, but with a reverse of the order of the buy and sell transactions. If you buy back the shares at a price lower than the price at which you originally sold them, you collect the difference. In this way, short selling is a way to profit from a falling stock.

Holding a Short Position on a Delisted, Bankrupt Company 

Quite simply, if you have an open short position in a company that gets delisted and declares bankruptcy, then you don't have to pay back anyone because the shares are worthless.

Companies sometimes declare bankruptcy with little warning, while other times it is a slow fade to the end. If you didn't close out your position before the shares stopped trading and became completely worthless, then you may have to wait as the company is liquidated before paying off investors.

However, the short seller owes nothing—zero, zip, nada. Obviously, this is the best possible scenario for a short seller.

Eventually, your broker will declare a total loss on the loaned stock, and your debt will be canceled with your collateral being returned.

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