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Trading a Stock in Bankruptcy: 5 Facts


Editor's Note: This story was published in Sept. 2010. Since then, Blockbuster's pink sheets have been temporarily suspended by the SEC.

NEW YORK ( TheStreet) -- The Chapter 11 bankruptcy announced by Blockbuster (BLOKA) on Thursday didn't slow down trading in shares of the video rental company. In fact, trading in its shares was more furious than ever. An investor might rightly wonder why anyone would trade shares of a company that has declared itself bankrupt. An investor might also wonder how a company can even continue to trade shares after declaring bankruptcy. Companies in Chapter 11 can and do trade shares, and those shares can re-emerge with the company after the bankruptcy process is complete. That is, if the company re-emerges from bankruptcy as a viable public company. In any event, trading in shares of companies going through the bankruptcy process is a high risk strategy. Here are 5 key questions and answers about trading in shares of a company that has declared Chapter 11 bankruptcy, courtesy of the Securities and Exchange Commission (important caveat: these rules do not apply to Chapter 7 bankruptcy). QUESTION 1: How can shares of a company that is in Chapter 11 bankruptcy proceedings continue to trade? ANSWER: A company's securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. However, even when a company is delisted from one of these major stock exchanges, their shares may continue to trade on either...