If your company goes into bankruptcy you can lose it all

— -- Q: If you have a stock and the company goes into bankruptcy protection, do you lose your investment or can you hold onto the stock in the event some value comes back?

A: Your question is a critical one, so I want to be as clear as I can.

If you invest in a company that has filed for bankruptcy protection, then yes, you can lose your entire investment. Even if the company goes through restructuring and comes back in some form, you still, as an investor in common stock, can lose it all.

That might not sound right, but the reason is simple: When you buy common stock, you're pretty much last in line to claim any assets a company might have after the trip to restructuring.

What happens during many bankruptcies is that companies, if they are not liquidated, cancel their debts. The bondholders, then, get the equity, or stock, of the company. Existing shares are cancelled and usually pushed off to a market like the Pink Sheets. These shares may trade for a penny or two as some speculators take a bet that there might be some value. Most likely, there isn't.

Investors in Kmart learned this the hard way. After that company was restructured, shareholders lost their entire investment. To this day, I get e-mails from shareholders who don't understand how they could have lost all their money when Kmart stores still exist.

Resisting the urge to pile into shares of a bankrupt company will be tough. Through mid-March, 46 public companies filed for bankruptcy protection, twice the number at this time last year, says BankruptcyData.com.

If you can't afford to lose all your money, don't invest in companies in bankruptcy protection. And if you do invest in one, realize you're essentially buying a lottery ticket.

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.