Investing in a Bankrupt Company

It may sound like a bad idea to invest in a bankrupt company, after all, something has to be wrong if they are filing for bankruptcy. While you may believe this to be true, it is possible that you are missing out on a great opportunity. There are many advantages to investing in a bankrupt company. Of course, this does not mean that it is the right type of investment for you. A company can file for bankruptcy for many different reasons, underneath all of the reasons are financial issues. Many companies file for bankruptcy so that they can restructure and grow from mistakes, economic market conditions or poor money management. You have to weigh the pros and cons before you get started.

Advantages

The biggest benefit of investing in a bankrupt company, and the reason why it has become so popular, is that the stock can be purchased at a very low cost. This happens because the companies will issue new stock as a way of paying back some of the debt that has accumulated in the past. This is a way for you to have the opportunity to buy stock at a “bargain basement” price.

As a company recovers from bankruptcy and begins to get on track, investors who paid a low price for stock will be able to take advantage of the increase of value. You will also be able to buy more stocks because the price is lower. You can compare the price that you pay to previous prices.

Disadvantages

Before you invest in this type of stock, remember, these companies went bankrupt for a reason. There is a chance that they will not recover, and you will lose your investment. If this begins to happen, the value of your stock will decrease and the investment that was supposed to grow is now looking like one that will cost you money.

Before you invest in a bankrupt company, you should review its income statement to get a better idea of their current standing. Consider the following question: will the company be able to produce enough cash to cover its liabilities? If you are unsure of the answer, you may be better off with an investment that is less risky.

If a company can file Chapter 11 bankruptcy, restructure, and pay off its past debt, they may be able to get back on the right track and eventually begin to see profits. It is a big risk, but if the company successfully emerges from bankruptcy, it is the investors who will benefit the most. There is no denying that investing in a bankrupt company is full of risk, but the higher the risk, the higher the reward. This is what attracts so many investors to bankrupt companies.  

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