Buying stock is a great way to get your money working for you to build your wealth. However, there is one scenario out there that many first-time investors may have pondered over: what if no one is selling the stock I want to buy?
No one selling a stock represents a scenario of zero liquidity. This can result in one of two scenarios: the bid price for that stock will get set so high that a shareholder is enticed to sell. On the other hand, a company can also buy back all outstanding shares of an underperforming stock to take the company private.
Although both of these extreme scenarios are uncommon, taking the company private has a bigger impact on shareholders. Keep reading to discover everything you need to know about what happens if no one sells a stock.
What Happens if a Company Doesn’t Have Any Shareholders Willing to Sell Their Stock?
If a company doesn’t have any shareholders willing to sell their stock, it represents one of two extreme scenarios:
- All shareholders believe that their stock is going to appreciate significantly in the future, and they see no reason to sell now when their stock will be worth a fortune later
- The price of a stock has dropped so low that all shareholders see no value in selling their stock and decide to just hold on to it and hope for a reversal in company fortunes
While neither of these extreme scenarios is likely to occur, supply and demand make the first scenario improbable. Let’s take a look and see why.
If shareholders believe that the value of their stock is so strong that they see zero incentive to sell at the current price, the market for this particular stock has nothing but buyers. In other words, there is nothing but demand in the market, with zero supply.
When markets are flooded with demand, the sellers have all of the power. Buyers have to keep raising and raising their offers to entice the shareholders to sell.
At some point, the offer will become attractive enough that someone will sell. Money talks, and when a seller decides that the cash incentive for selling is too great, they will make a deal.
This establishes a new market price for the stock, which may entice other sellers to get in on the action.
How Liquidity Effects Selling Stocks
While this makes sense in theory, the issue with stocks that are not selling is primarily one of liquidity. It can be said that liquidity has reached zero, and there are some other factors in play other than share price that is preventing the stock from trading.
This can make it challenging to find a partner to sell at the volume you want to trade at. Let’s say a seller holds 1,000,000 shares of stock. They can like the offer you make but they can also require you to buy a minimum number of shares.
If you do not have the funds to purchase in the given quantity, the stock may remain in a state of zero liquidity until a new market price can be established, thus potentially prompting more sellers to enter the market who may be willing to trade at your preferred volume.
What are The Different Types of Buyouts That Can Happen?
Of the two scenarios above, the second is most likely to happen. If a stock’s price falls to a level where investors see no value in trading it, then a buyout can occur.
Companies list publicly traded shares of stock to raise money to fuel growth. When the stock is no longer selling, it is not “doing its job.”
Therefore, the company can choose to buy back all of its shares and take the company private. In addition to ceding some control over operations, there are listing and regulatory fees involved with being a publicly traded company, so it may make sense to buy back shares and de-list.
There are a couple of ways a buyout of a publicly traded company may occur. In a cash-only deal, shareholders will receive the cash value of what their shares are worth. In many situations, this will be a fraction of what they paid for them. The parent company or the acquiring company gains control of all outstanding shares and takes the company private.
In a for-stock transaction, shareholders will receive a commensurate value of the acquiring company’s stock in exchange for their shares.
One other possibility is that of a hostile takeover. This is when a private shareholder identifies devalued shares of a company. Often these entities feel that they could do a better job of managing the company than the current leadership.
In this approach, the acquiring shareholder side steps management and goes directly to other shareholders, purchasing enough shares (more than 50% of those outstanding) to give them controlling interest in the company.
In a hostile takeover, shareholders will usually get a bit of a premium on their deflated shares as the hostile entity is willing to pay more to guarantee they get a controlling stake in the company.
What You Need to Know if You’re Considering Selling Your Stock in a Company?
There is really no cap on what you need to know when selling your stock in a company. However, here are a few important tips:
- Volume matters – finding partners to trade in agreeable quantities can be difficult. However, micro-investing apps, such as Robinhood, have made it much easier and affordable for beginning investors looking to sell in small lots
- Taxes – you will get taxed heavier on short-term capital gains than long-term capital gains. Therefore, it is better to hold your stock for at least a year before selling to limit your tax liability. You can also get a tax break if you sell your stock at a capital loss
- Limit orders are best – when you decide to sell, submit an Ask price to your brokerage. For low-liquidity stocks, there may not be a buyer willing to pay your ask price. Unless you specify that you will sell “if and only if” you receive your ask price (limit order), the trade may execute at a lower price than you want
Other factors to look into before selling your stock include pre- and post-market hours, selling on the weekend, and technical indicators that could signal the most opportune times to sell.
The Bottom Line: What Happens If No One Sells a Stock
No one selling a stock represents a scenario of zero liquidity. As a result, the price of the stock rises to a point that those holding the shares are enticed to sell. When this happens, the outstanding shares of a poorly performing company can be bought out. This could result in the company going private and attempting to turn fortunes around.
We hope you found this helpful!