Can a bank rescue wipe out your investment? You bet
— -- Q: Can bank stocks become worthless if the economic situation gets worse and the banks ask for government help?
A:Yes. Yes. Yes.
This question comes in so frequently I want to make myself entirely clear. If you invest in a bank stock, and that bank is deemed insolvent and taken over by the government, you can and likely will lose your investment in the bank's common stock.
It's true that the bank might sue the government and insist the move was illegal. And that might allow the shares to trade like options, on the chance that some money might be recovered. But that's like losing a $100 bill and being thrilled because you found a parking meter with 15 minutes left on it.
When you invest in any common stock, and that includes bank stocks, you can lose everything. If the company fails, you are last in line for a claim to any remaining assets. You don't get paid until the employees, creditors and then bondholders are paid. And usually, there's not much left at the asset banquet by the time the common stock holders get a plate.
My goal isn't to raise alarm or concern about the health of banks. I'm not saying more banks are going to be taken over. But as a common shareholder, you need to be fully aware of the risk that you can lose your entire investment. And you can see here, there's been no shortage in the number of banks failing.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz
Related Stories
ABC News Live