The economy is in a slow period, and bankruptcies are making headlines. So, lately, I’ve been fielding a lot of questions about the pecking order investors assume when a publicly traded company goes into bankruptcy.

Here’s what you need to know…

• First, debt holders get their money before equity holders. In other words, people holding the bankrupt company’s corporate bonds will be paid in full before anyone holding the stock sees a penny. This doesn’t mean that bondholders always get paid in full - just that they get paid before stockholders.

• If the company has preferred shares, holders of those shares get paid before holders of the common shares. Most of the stocks that are reported on by CNBC and in the financial section of your local newspaper are common shares.

• Who gets paid last? Usually, it’s you, the common investor.

This pecking order isn’t a concern most of the time. But with companies like Fannie Mae and Freddie Mac teetering on the brink of disaster, it certainly deserves your attention. Should Fannie and Freddie get consumed by the federal government, it could come into play.

As is always the case, you need to do your homework before you invest. If you are looking at investing in a company that has a lot of debt and preferred shares, beware. If the company gets in trouble, you will be the last in line to be paid if you invest in its common shares. You can protect yourself by shying away from companies with lots of debt.

[Ed. Note: Making smart investment choices is the best way to protect your money. Companies with strong fundamentals are best equipped to withstand major market changes. But don't be afraid of small fluctuations in the market. These movements can offer you the perfect opportunity to profit. Learn more here.]

Similar Articles:

• The Investment Pecking Order Comes Into Play - I’ve cautioned you before about settling for the common shares of troubled companies. Why? Because i…
• Preferred Shares Aren’t Just for the Pros - One of the more unpopular asset classes right now is a stock/bond hybrid called preferred shares. Wh…
• Dear ETR: How Do Bailouts Affect Stock Prices? - “In his article entitled ‘Financial Word of the Week: Bailout,’ Charles Delvalle said that if a pers…
• The Attack of the "Old Maids" - Do you remember the card game "Old Maid?" I remember playing it with both my kids many yea…
• The Real Reason Behind Share Buybacks - Companies know investors love getting cash. And there’s no quicker way to put money into inves…
• The Effect of Corporate Bankruptcy on Stocks and Bonds - As a stock or bond holder, you are part owner of the corporation whose stock or bond you hold. So wh…
• A Leveraged ETF for All Market Conditions - Most investors would agree that in tough economic times one safe haven is consumer staples. Companie…