why stocks will likely to go up after chapter 11 bankruptcy?
First I’d like to know something about Chapter 11 bankruptcy. How does it work? some people say it’s a debt reconstruction, it doesn’t actually mean the company goes bankrupt. But why it’s called "bankruptcy protection", how does it relates to bankruptcy?
Second, why the price of a company’s stock will go up after chapter 11 bankruptcy? Do you think right now is a good time to invest in GM and Six Flags inc? Thank you!!
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Stocks do not go up after chapter 11. Most of the time, the current stocks are cancelled and new companies are formed {Example: United Airlines is gone. Its now UAL Inc. which owned the name United. American Airlines is now AMR Corp.) General Motors Corp. has announced several times that barring a miracle (like every non GM car owner in the country rushing out to buy a GM car), the current stock will become worthless and be cancelled.
So don’t buy stock of companies in bankruptcy. It is more than just debt reconstruction. In Chapter 7, all the assets are sold for cash. In Chapter 11, some assets are sold for cash (Saturn, Opel, Pontaic in GM case) and some will be transferred to the "New" company. Then later, new stock will be sold on the open market.
The management of GM is begging investors not to buy GMGMQ stock anymore. Because this stock has no value. But many investors keep buying it anyway.
http://www.footnoted.org/blog-notes/gm-please-dont-buy-our-stock/
Buying worthless stocks usually leads to the loss of your whole investment. And for this reason you shouldn’t buy shares of any company that has filed for bankruptcy.
The old stock does not go up – it is wiped out. The new company issues new stock.