As a stock or bond holder, you are part owner of the corporation whose stock or bond you hold. So what happens if that company goes into Chapter 7 bankruptcy?
If you are a stockholder, you’ll see a huge drop in the value of your shares. And the worst part is that when it comes to paying back debtors, stockholders are at the very end of the list. Which means that if the company goes bankrupt, you take on the most risk. In fact, you shouldn’t expect to be compensated at all.
If you are a bondholder, your risk is much lower but it isn’t eliminated. When a corporation claims bankruptcy, it first has to pay any back wages, mortgages, credit lines, and other corporations it owes money to. Cash left over is used to compensate bondholders. Oftentimes, you can’t expect to get back your entire investment.
The best way to avoid what a corporate bankruptcy could do to your portfolio is to buy companies that have ample cash, little debt, and steady profit and revenue growth for the past three years.
How do you find that information? Go to finance.yahoo.com and enter the ticker symbol of the company you are interested in. Once there, look at the bar on the right-hand side and choose “Key Statistics.” All of the company’s important financial numbers will be right there.[Ed. Note: As investment analyst Charles Delvalle points out, you need to understand what you’re doing when you put your money into a company. We’ve put together a surprisingly simple system that can help you make the best choices.]