UNDERSTANDING
DELISTING OF ASSETS

A delisting event can significantly impact the value of a stock or other type of asset you are holding. If you know or think one could be about to take place, then there could be considerable benefit from developing a better understanding of how the process works and what the effects could be.

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Delisting events may occur relatively infrequently but if a stock, bond, crypto, or ETF you hold is going through one then it is crucial that you understand how the process works. It could be that making the right decision protects your wealth.

Your response to a delisting will depend on the reasons for it taking place and whether it is voluntary or involuntary. You will also need to make sure you gather as much information as possible. Preparation is key, and this is what you need to know.

What does delisting mean?

The term delisting explains the process where an asset such as a stock is removed from an exchange such as the London Stock Exchange. The crucial factor for investors to keep in mind is that after a delisting you will no longer be able to trade that instrument on the exchange.

A delisting is a type of corporate action, it relates to the mechanics of how you invest in and trade an asset. It doesn’t necessarily relate to the underlying business model of the company involved, but some delistings will be a sign that a company is in trouble.

Common reasons for delisting

There are a wide range of different reasons that a stock might be delisted:

• Investment opportunities – An investor may buy up the available shares in a company and take control of its assets because it feels the exchange listed stock price undervalues the company.
• Cost – Firms may decide to make savings by delisting and removing the need to comply with the reporting requirements of an exchange which can be costly.
• Governance – Private companies can make business decisions faster than publicly listed ones. The latter have to comply with regulations relating to things such as shareholder voting rights which take time to process. 
• Long-term planning – Restructuring a firm to unlock its true value can take time. Privately held firms face less scrutiny from shareholders who may prioritise short and medium term interests.
• Mergers and acquisitions – When one company buys another and takes control of its assets.
• No longer meets listing requirements – Firms are required to have a minimum market capitalisation to be listed on an exchange. If the share price drops to a level where it breaches that condition it can be forced to delist.
• Lack of investor interest – A firm may delist from one exchange and move to another if it believes that investors on the new exchange are more likely to buy its shares.
• Compliance – Firms which fail to comply with compliance rules or reporting requirements can be forcibly removed from an exchange.
• Fraud – To protect investor interests and their own reputation exchanges will remove firms which commit fraud.

Differences between voluntary and involuntary delisting

The main difference between voluntary and involuntary delistings is that involuntary ones tend to be bad news for investors. Exchanges encourage firms to list on them so the fact that they initiate a mandatory delisting is a potential red flag.

A stock is voluntarily delisted when the directors and shareholders of a firm instigate the process. Instances where this might occur tend not not to be associated with crisis management and can include a company being bought out as part of a merger, or management taking the decision to switch to another exchange for strategic reasons.

How delisting affects your investments

A delisting event can significantly impact the value of the stock or crypto you hold and your ability to convert it into cash. 

Immediate impacts

If an asset you hold has been suspended from trading at an exchange that means you won’t be able to book a sell trade through your nominated investment platform.

There may be alternative ways of selling your position, for example on the OTC market, but off-exchange deals may be subject to  liquidity issues. Illiquid markets are associated with wider bid-offer spreads, greater levels of price volatility, and a lack of flexibility in terms of when you can trade.

What happens to your holdings?

Each delisting is a unique event but there are some frequently observed outcomes. Your assets may be converted into cash or alternative assets such as shares of a company which instigated a merger or acquisition. If the company you own delisted shares in is going into liquidation then there is a chance you may be entitled to a share of the residual value of its assets.

Managing your portfolio during a delisting event

There may be steps you can take to protect your interests during a delisting event and there are also ways to try to spot if one might be about to occur.

Steps to take if an asset is delisted

Once a delisting has been confirmed it is essential to keep up to date with all the official notices which will be shared with shareholders. These will provide details of the timelines involved and what options are available.

Gathering as much information as possible will help you make an informed decision about whether to try to sell the shares or hold onto them.

Risk management strategies

Delistings aren’t necessarily bad news for investors, but the way they make it hard for you to liquidate a position means they do have to be factored into risk management strategies. These are the steps you can take to help you protect your investment returns.

• Monitor your portfolio – Official news reports and erratic price moves can offer signs that a position you hold needs to be closely monitored.
• Utilise social trading tools – Online forums where traders share thoughts and ideas can be an ideal place to spot suggestions that a stock might be on its way to being delisted. 
• Limit your exposure to single stocks – Use diversification to spread capital across different types of assets so that if one is delisted it has less impact on your overall returns.
• Trade out of positions – With so many stocks available to trade you may want to consider rotating into ones which are less likely to experience and delisted and are a more straightforward investment proposition.

Final thoughts

There are a wide range of reasons why a delisting might occur and a multitude of possible outcomes. Most of the potential downside can be managed by following the golden rules of investing and through effective and regular monitoring of your portfolio. 

If you do find yourself in a position where you are having to manage a position in a delisted stock, it is crucial to ensure you are set up to receive messages which will outline ways you can protect your wealth.

Visit the eToro Academy to learn how to protect your interests during delisting events.

FAQs

How will I know if an asset I hold is going to be delisted on eToro?

eToro will send emails and/or App push notifications to those who hold positions in a stock or cryptoasset which is being delisted. You can set up the messaging service to suit your personal preferences but also need to ensure messages are not diverted to your spam folder.

Can I still trade a delisted asset on eToro?

As soon as an asset is delisted it can no longer be traded on the eToro platform. The treatment of your holding will depend on the reasons for the delisting and the specific terms relating to the process. These will be communicated to you via the eToro messaging system.

Will I lose money if an asset I own is delisted?

Not necessarily. Although some delistings are undoubtedly bad news for investors and may relate to a firm going bankrupt, other stocks are delisted for strategic reasons. In the case of a corporate merger for example, if a tender offer is successful, the shares will be liquidated and converted to cash which eToro will distribute to each individual’s account.