December 3, 2008

Circuit City stock: Don't bet on bankruptcies

Q: If I invest in Circuit City stock (CCTYQ), could I lose my entire investment?

A: Yes. Yes. Yes.

Don't make any mistake about this. You don't want to be like scores of Kmart shareholders who were stunned when that retailer's reorganization completely wiped out their investments.

The five-letter ticker symbol ending in Q tells you the company is in bankruptcy. You can lose your entire investment if any company whose stock you own, not just Circuit City, falls on tough times.

Even if a company emerges from bankruptcy, the SEC says, "in most cases the plan of reorganization will cancel the existing equity stock."

FIND MORE STORIES IN: Kmart | Ask Matt | Circuit City

Again, I'm not picking on Circuit City, which filed for Chapter 11 bankruptcy protection in November and intends to keep operating.

It's true any time you buy common stock. You're what's called an equity investor. If a company falters, reorganizes, files for bankruptcy protection or runs into trouble, you're last in line for claims on the company's assets. What often happens is that investors who bought the company's debt take control of the company and divide the assets, wiping out the common shareholders.

I cannot stress this enough. Please don't act surprised if you buy stock in a struggling company and find that your shares are worthless.

This happens time and time again, and each time, shareholders feel victimized. Certainly, if management misrepresented the company's condition, you would be rightly aggrieved. But if you buy shares in a company knowing it's under stress, you must understand you're gambling. Period.

With that said, I did write a more detailed analysis of Circuit City before the latest trouble. But the basic analysis still holds. Investors beware.

Source: CRN

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