Delisting refers to the formal removal of a company's stock from a securities exchange, ceasing its trading on the exchange. Delisting typically occurs due to a company facing financial difficulties, declining performance, violation of exchange regulations, or other serious issues.
Delisting can happen on different securities exchanges, such as Nasdaq, New York Stock Exchange (NYSE), etc. The reasons for delisting are varied, but they are often related to the company's financial condition and business performance. When a company faces bankruptcy, reduced assets, excessive debts, or sustained losses, the exchange may decide to delist its stock.
The delisting process usually follows regulations and procedures set by the exchange. The exchange may issue announcements informing investors about the delisting of the stock. After delisting, investors will no longer be able to trade the stock on the exchange, but they can still trade it in the over-the-counter market. However, the stock's liquidity may become lower, leading to wider bid-ask spreads.
Speaking of delisted companies, a prominent case is Lehman Brothers.
Lehman Brothers was an American investment bank and financial services company founded in 1850, with a long history and reputation in the U.S. and global financial industry.
However, with the outbreak of the 2008 global financial crisis, Lehman Brothers faced severe financial troubles.
The company held a large amount of subprime mortgage loans, which became almost worthless after the collapse of the real estate market bubble. Due to excessive debts and devalued assets, Lehman Brothers filed for bankruptcy protection on September 15, 2008, marking one of the largest bankruptcies in U.S. history.
Lehman Brothers' bankruptcy not only caused turmoil in the global financial markets but also resulted in significant losses for many investors. Its delisting marked the end of an investment bank with a century-long history.
This story reminds us that even historically significant and reputable companies can face delisting risks due to financial problems.
In addition, the bankruptcy announcement of Silicon Valley Bank and its entry into the OTC market in 2023 serves as a typical case.
In March 2022, the Federal Reserve announced the commencement of interest rate hikes. By March 2023, the cumulative rate hike by the Federal Reserve reached 450 basis points, causing a rapid surge in US bond yields.
As the Federal Reserve continued its significant interest rate hikes, many financial institutions in the United States experienced a flip in cost and income. Bonds that were allocated in the earlier period faced unrealized losses, and there was a mismatch in fund duration, leading to a liquidity crisis. Against this backdrop, Silicon Valley Bank collapsed dramatically, becoming the largest bank failure in the United States since the 2008 financial crisis.
Following its delisting, Silicon Valley Bank entered the OTC market, but on its first trading day, it experienced a "flash crash," with the stock price plummeting by 99.62% by the close, leaving many investors with substantial losses.
Therefore, concerning delisting, you need to closely consider the following points:
Company's financial condition: Delisting often results from deteriorating financial conditions. Hence, when selecting investment targets, carefully analyze the company's financial statements to ensure its financial health.
Monitor delisting risks: You need to closely monitor developments in the companies you invest in, especially factors that could lead to delisting. For instance, watch for financial scandals, legal litigations, or poor management.
Diversify investments: To reduce the risk of single investments, you should diversify your investments and not put all your funds into one company's stock.
Understand market rules: Different markets have different delisting regulations. You need to understand the relevant rules of the market you are investing in to make informed investment decisions.
Overall, delisting is a significant risk in investing, and investors should remain vigilant and take appropriate risk management measures to protect their investment interests. Prudence and thorough research are key to success in the investment process.