Due to the pandemic, a lot of businesses are struggling to keep up with the business operations. Many have already closed their businesses because of the losses that they incur every day. And there is still no certainty when will the economy bounce back to its normal movement.
When a company declares bankruptcy, the stockholders will take all the blow of the losses. Even if the company owns plenty of assets, it doesn't guarantee the stockholders that they can get their money back. But why? It is because the company must pay first all of its obligation above all else.
In liquidation (case of selling the assets to pay creditors), there is an order of priority when paying the liabilities and stockholders:
1. Secured liabilities with pledged assets (collateral)
2. Administrative expenses, salaries, taxes, and other legal obligations
3. Other secured liabilities
4. Unsecured liabilities
5. Preferred stockholders
6. Common/ordinary stockholders
After paying all the liabilities, if the company still has remaining money, the preferred stockholders are the first ones to receive their investment. It is because preferred stockholders are first in the priority of the company's income over the common stockholders. However, the difference is, preferred stockholders have no voting rights, but the common stockholders do.
The liquidation process typically takes a very long time, because the company is selling all the assets, and these need to undergo valuation. This is the reason why stockholders (and traders) should always keep themselves posted about the company's financial status. So, before the company becomes insolvent, they still have the chance to sell their stocks and get their investment back.
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