It is an "et tu, Brute?" moment for investors who reposed big faith in companies after careful analysis and sifting through, only to find the securities of the company disappear without a trace from the exchange. An investor might have experienced the moment at least once, as companies opt to/are forced to delist their shares due to multifarious reasons.
What Delisting Means
Delisting refers to the process by which a listed security is removed from an exchange on which it is traded. Delisting could further be classified into voluntary delisting and involuntary delisting.
Voluntary Vs. Involuntary Delisting
Some companies may voluntarily opt to delist their shares from an exchange. Does that mean they are fickle minded? Probably not. The decision to voluntarily delist may be taken weighing in the cost-benefit ratio. Companies may deem it too unviable to have their stocks listed, as legal and compliance costs associated with listing may outweigh the benefits arising out of a listing.
Moving over to involuntary listing, it can be viewed as the company being kicked out of an exchange as it failed to comply with listing standards laid down by the exchange. When a company goes out of business, delisting is a natural corollary.
Summarizing The Major Reasons For Delisting
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Bankruptcy.
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Absence of trading or negligible trading.
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Non-compliance with ongoing listing standards.
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Company going private.
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Costs related to listing outweighing the benefits associated with listing.
How Companies Steer Clear Of Delisting?
Complying with ongoing listing standards of exchanges where shares are listed is one surefire way of warding off delisting. The compliance reassures investors of the credibility of the company in question. On the contrary, when a company flouts these norms, it's forced out of an exchange.
How Are Investors Impacted By Delisting?
When a security gets delisted, it ceases to trade on a major exchange. That said, technically, the holding of an investor is intact, and he can still trade in the security, provided there are willing buyers.
However, in reality, the ownership right to the security becomes worthless. The announcement, which is made prior to the delisting by companies themselves if it is a voluntary delisting, or by the exchange, if it is an involuntary delisting, sends the share spiraling down, rendering your investment worthless.
The security may become illiquid. Once a stock is delisted from a main exchange, it will be relegated to trading in the OTCBB or the Pink Sheets. These loosely regulated exchanges do not provide easy access to everyone to trade.