Do You Know How Corporate Bankruptcy Affects Your Stocks and Bonds?

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Any investor who holds stocks or bonds of a certain company is, in part, owner of that business.

In view of this, do you know what happens if you own stocks or bonds of a corporation that goes into Chapter 7 bankruptcy?

No?

Let us tell you what you’re facing if such a scenario ever happens:

- If you are a stockholder and the company files for bankruptcy, you will not only see a massive decline in the value of your shares but you will also move to the very end of the list when it comes to paying back debtors.

What this means is that if the business goes down, you undertake the largest part of the risk, and actually, you should forget about ever being remunerated.

- If you are a bondholder you face a much lower risk than the stockholder, but you are not free of loss.

When a company files for bankruptcy, the first things it has to pay are back wages, mortgages, credit lines, and the money it owes to other companies. Whatever cash is left afterward is used to remunerate bondholders, but in many cases you will not receive your full investment.

The best way to stay away from companies that could go bankrupt is to buy stocks and bonds of businesses that have had lots of cash, little debt, and a solid profit and income growth for the past three years.

And where do you find such companies?

Go to finance.yahoo.com and type in the ticker symbol of the company that has caught your eye. In there, take a look at the bar on the right-hand side and select “key statistics”, right there you will find all the important information about that company’s finances.

It is crucial that every investor understand what he is doing when he puts money into a company; it is your responsibility to thoroughly research and learn to ensure you are making the best choices.

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