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How To Determine if Buying Stock In A Bankrupt Company is Right For You?

By Jason Markum

Investing in the stock market is arguably one of the hardest professions anyone can undertake these days. Make just a few simple errors and a lifetime of saving and investment can be wiped out in the blink of an eye.

If there’s one thing that’s harder than stock market investing, that is investing in companies that have gone through bankruptcy or are in the process of going bankrupt. Most sane investors run kicking and screaming from bankrupt companies but if you keep your head about you and apply certain common sense measures, then investing in bankrupt companies can be quite lucrative if you know what you’re doing and that’s exactly what I’m going to talk about in this article today.

I’ll be perfectly honest and straight up with you… buying stocks of bankrupt companies is an incredibly high risk investment. On the other hand, high-risk usually translates into high potential payoffs and that is why most people get into the bankrupt stock game.

There are two main rules when it comes to investing in bankrupt companies. Follow these rules and you stand a better chance of surviving. The first rule is to wait until the company actually goes bankrupt. Many times investors feel the urge to jump into the breach too soon. The first thing to be wiped out in any bankruptcy is the original shareholders stock. So if you buy your shares before the company declares bankruptcy, you will most likely see your shares evaporate in court and be worth zero with no future claim on the company.

The second rule is that after the company has actually declared bankruptcy you have got to find as many ways as possible to reduce your risk. Many people do this by investing in several different bankrupt companies at one time thus spreading the risk as much as possible.

I suggest you watch a bankruptcy closely before you invest in one… do sort of a dry test run. You’ll notice several things; for instance the stock prices will plummet before bankruptcy but then when the bankruptcy is announced the stock will drop usually again sometimes as much is 50% more before leveling out for quite a while. The point is, there is a certain ebb and flow to these things that you’re going to want to familiarize yourself with before jumping in and investing with actual money.

Another way to spread out your risk is to invest in companies that have been in Chapter 11 bankruptcy for quite a while already. A brand-new bankrupt company is usually incredibly unpredictable and unstable as they go through systematic dramatic changes that are hard to foresee before hand. It can take up to a year to a year and a half before bankrupt company starts to stabilize in any noticeable fashion.

Finally if at all possible look for companies that still have profitable divisions. Many times bankrupt companies go bankrupt because one major division fails while at the same time many other divisions within the company still function perfectly well. These companies have a much greater chance of making it through bankruptcy because of the constant cash flow from the still viable divisions.

However you finally decide to jump into the game just be aware that this is not a play for everybody. Never commit the majority of your investment portfolio to bankrupt strategies, keep them a minor part of your portfolio mix and you’ll be much better off in the long run.

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