Why is it that investors are buying stocks in companies that are on the verge bankruptcy like AIG (AIG) and General Motors (GM)? Is there any benefit to buying at this price, and what would be the worst-case scenario of my investment?
–Mike Ghazala ANSWER: Let’s get right to the point: The worst-case scenario is you lose your entire investment. When a company files Chapter 11 the business is reorganized, but there’s no guarantee shares will be worth anything once the company emerges from bankruptcy protection. Ditto for a Chapter 7 bankruptcy liquidation, in which a company’s assets are sold off. Rules governing corporate bankruptcies generally dictate that secured and unsecured creditors — banks, bondholders and the like — get paid off first. Stockholders are last in line, and often there’s nothing left by the time their turn comes around. If there are assets remaining, stockholders may receive shares in the newly reorganized company. So why do investors buy shares of companies on the verge of bankruptcy? Some may truly believe the company will avoid disaster and bounce back, making the shares an attractive long-term investment. More often than not, though, investors are looking to make a quick buck on a short-t
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