One financial news that caught the attention of the world at the time of the coronavirus pandemic was the drop in oil futures contracts’ value to negative. Specifically, the May 2020 NYMEX West Texas Intermediate (WTI) futures contract fell to -$37. It was the first time that the value of a futures contract was negative. Such a scenario led many to a question – can the market value of a share be negative?
Can the Market Value of a Share be Negative?
Well, the answer to this question can the market value of a share be negative is ‘No.’ This means the share price can never be negative, but it can be zero. The value of the stock can be zero if the company goes bankrupt.
Technically, the stock value can’t be zero as well. This is because the exchange will delist the stock if it remains below the minimum price for too long. Moreover, investors also don’t wait for the stock price to hit zero. They are likely to sell the stock once it starts dropping.
Scenarios when Investors Lose More than Principal
Even though the share price can never be negative, investors can lose more than the principal amount. It implies that investors can lose more than the amount they invested in the shares.
For example, if an investor puts $5,000 to buy 100 shares of $50 each, and if the stock price drops to zero, then the investor would lose $5,000. In this case, the investor will lose only the principal amount. But if the investor borrowed money to invest in the shares, then they would lose more than the principal amount. In this case, the investor would lose the principal amount, as well as the interest payments.
Also, if an investor is shorting the shares, they could also lose more than the principal amount. If an investor is using derivatives, such as options or futures, then also they can lose more than the original amount.
Investors trading on margin can also lose more than their investment if the stock price drops and the broker issues a margin call.
What else can be Negative?
Though stock prices can’t be negative, the value of a company can be negative. For instance, suppose the liabilities of a public company are more than its assets. In this case, shares of the company won’t be negative, but the company’s value (or enterprise value) could be negative.
If the enterprise value remains negative for a long, it could result in bankruptcy. Or, we can say the share price can drop to zero. As said above, even in this case, investors won’t lose more than their investment.
Now we know that the share price can drop to a very low level and are capable of dropping to zero, but it can never fall below zero or be negative. An investor, however, could lose more than their original investment in certain scenarios.