Understanding Distressed Securities: Risks and Opportunities

Distressed securities represent a very high-risk investment in the market. Here are the basics of distressed securities and why some people choose to invest in them.

Distressed Securities

A distressed security is an investment tied to a company that is in the middle of tough financial times. Most of the time, the company is on the verge of filing for bankruptcy. Sometimes, the company is already in the process of filing bankruptcy. Some investors will purchase shares of stock or corporate bonds in these companies. This presents a very high-risk scenario because, if the company does go bankrupt, the amount of equity in these investments will be worth nothing.

Why Invest in Distressed Securities?

Even though these companies are in distressed situations, some people still choose to invest in them. The main reason behind this is that they can sometimes secure a substantial bargain. When a company is on the verge of bankruptcy, the price of their stock will plummet. If you believe that the company is not in as bad of shape as everyone thinks, you can invest in the stock for pennies on the dollar. Then, if the stock does in fact rebound, you will make a substantial return on your investment.