One of the questions that many novice traders ask themselves is how big a drop in the stock market can be. Indeed, in the event of a very strong bear market or stock market crash, can the price of a share fall back to zero euros? Although it is not uncommon for stocks to lose almost half of their value in a short period of time, it is impossible for a stock to fall back to zero euros. In this article, we will explain why the price of a share can never lose 100% of its value and therefore why a share cannot fall to zero euros.
In order to better understand why a share cannot fall to zero euros, it is first necessary to distinguish between the value and the price of a stock.
The value of a share is an estimate of the value of the company issuing that share. The value of a share on the stock market is therefore calculated on the basis of financial analysis. The balance sheet data, the income statement and the financial key figures of the issuing company are used for this purpose. The value of a company is based on what it owns, i.e. its assets with cash, stocks or real estate, and what it owes, i.e. its liabilities with debt or equity. It is also possible to assess the value of a share based on cash flows or various financial ratios.
The share price is the market's estimate of this value. It also gives the total market capitalization of the company by multiplying the share price by the total number of shares outstanding.
When the price of a share is higher than the actual value of the security, it is said to be overvalued. If the share price is lower than the actual value of the security, it is said to be undervalued.
Now that we know the difference between a stock's value and its price, let's ask ourselves whether or not the value of a security can be zero. The reality is that for this to happen, the company issuing the security would have to go bankrupt. In that case, the company in question is no longer listed on the financial markets. It is therefore no longer possible to trade its securities, but this does not mean that the share price has fallen to zero.
It should also be noted here that when a company goes bankrupt, it is still likely that the company still has value. Indeed, each company owns a certain number of assets such as equipment or real estate that have a value of their own and can be sold. When the company's debt has been settled, the shareholders can thus recover part of their invested capital through the resale of these assets. It also happens that a bankrupt company finds a buyer, and it is not possible to buy a company at zero euro because the buyer has to pay at least a symbolic one euro for this transaction.
Let us now look at the course of action and the possibility of it falling back to zero. As we briefly mentioned in the introduction, while the share price can lose much of its value over long periods of time, it can never be zero. However, a security may be temporarily suspended from trading when the fall is too great and too rapid, or even be delisted in the event of a company bankruptcy or a share buyback by the main shareholder.
It also happens that the share price continues to fall for a very long time. However, it will never reach zero euros as long as the stock is quoted on the market. Thus, the price of a stock can perfectly well lose 99.99999% of its value but can never lose 100% of its value. Thus, we sometimes see spectacular discounts on certain stock market securities but, in no case, it is possible for a security to become worthless. To better understand this phenomenon, one can compare a stock market share to a real estate property. The latter can indeed lose much of its value but will never be free as long as it exists and as long as it is not destroyed. The same applies to a stock market share.