What happens when you short a company and it goes bankrupt?

Based on the most helpful WSO content, here's what you need to know about shorting a company's stock and what happens if it goes bankrupt:

1. Maximum Return:

   • When you short a company's stock and it goes bankrupt, you can achieve the maximum return on your short position. This is because the stock price typically plummets to zero or near zero, meaning you don't have to cover the short at a higher price.

2. Delisting from Exchange:

   • If the company goes bankrupt, its stock often gets delisted from the exchange. This means it will no longer be traded on major stock exchanges and might move to over-the-counter (OTC) markets.

3. Covering the Short:

   • In the event of bankruptcy and delisting, you would still need to cover your short position. However, since the stock price is likely to be extremely low, the cost to cover would be minimal.

4. Liquidation Scenario:

   • In a liquidation scenario, shareholders are indeed at the bottom of the capital stack. Debt holders and other creditors are paid first. Shareholders often receive little to no value, which benefits the short-seller as the stock price remains very low or worthless.

5. Practical Considerations:

   • It's important to note that while the theoretical maximum return is achieved when the stock price hits zero, in practice, there might be some complexities in covering the short position, especially if the stock is delisted and trading OTC.

In summary, shorting a company's stock that goes bankrupt can be highly profitable for the short-seller, as the stock price typically drops significantly, and shareholders are the last to receive any remaining value in a liquidation scenario.

Sources: Value of Short Selling Skill Set, Pitching a Short for the Stock of a Bank you are Interviewing with, Distressed debt / special sits investing - On the job, What are the most common ways a company can enter bankruptcy?, https://www.wallstreetoasis.com/forum/investment-banking/how-are-stock-prices-determined?customgpt=1