can you lose stocks: risks explained

Can Stocks Lose Value?

Investors often ask a simple question with complex implications: can you lose stocks — and if so, how much? This article explains the mechanics behind stock and crypto losses, when an investment can become entirely worthless, situations that can make you owe more than you put in, and practical steps retail investors can take to limit risk. You will leave with clear definitions, real-world examples, tax and reporting basics, and operational precautions (including custody recommendations like Bitget Wallet).

Overview and key concepts

Before answering “can you lose stocks” in detail, it helps to define core terms.

• Equity ownership: owning a share means you own a fractional claim on a company’s assets and future earnings.
• Market price vs. intrinsic value: the quoted price on an exchange reflects supply and demand, while intrinsic value reflects fundamental worth.
• Unrealized vs. realized losses: an unrealized (paper) loss exists while you still hold the shares; a realized loss happens when you sell at a lower price.
• Cash accounts vs. margin accounts: in cash accounts you use only your funds; margin accounts allow borrowing and increase the potential to lose more than your initial capital.

This background frames the answer to “can you lose stocks” across ordinary investing, leveraged trading, and crypto-specific custody and protocol failures.

How stocks can lose value

A stock’s price moves because of changing expectations about a company’s future cash flows and risk. Key drivers of price falls include:

• Company fundamentals deteriorating: falling revenues, rising losses, or failed products.
• Negative news and legal/regulatory events: fines, investigations, or lost licenses.
• Macro shocks: recessions, interest-rate spikes, or sector-wide crises.
• Market sentiment and liquidity shifts: sell-offs that push prices down when buyers are scarce.

Price declines create losses for shareholders. If you sell after a decline you lock in a realized loss. If you hold, a decline can remain unrealized and may recover — or it may become permanent if the company fails.

Temporary declines vs. permanent loss

Not all price drops mean permanent loss. Volatility causes temporary paper losses that often recover with time. Permanent loss occurs when shareholder value is destroyed — for example, through bankruptcy and liquidation or deliberate corporate actions that cancel or wipe out equity.

Answering “can you lose stocks”: yes — you can experience temporary losses frequently, and you can suffer permanent loss in severe scenarios.

Scenarios where shareholders can lose all or most of their investment

Below are concrete ways shareholders can end up with little or no value from their equity holdings.

Bankruptcy and liquidation

If a company becomes insolvent, it may file for bankruptcy protection and enter liquidation. Creditor claims (secured lenders, bondholders, taxes) are paid first; common shareholders are last in line. In many bankruptcies, common equity is canceled or reduced to near-zero value.

Bankruptcy can take multiple forms (reorganization vs. liquidation), but the practical effect for common shareholders is often the same: their shares can be wiped out. Historical examples include major corporate collapses where ordinary shareholders received nothing after creditor claims were satisfied.

Delisting and thin markets

When a stock is delisted from a major exchange it often moves to over-the-counter (OTC) trading. Delisting can reduce liquidity and investor interest, making it hard or impossible to find buyers at any reasonable price. Illiquidity can lock in heavy losses because sellers have fewer options.

Corporate actions and dilution

Shareholder value can be eroded by corporate actions:

• Dilution: issuing many new shares (e.g., for financing) reduces the ownership percentage of existing shareholders.
• Reverse splits: sometimes used to prevent delisting but may not restore fundamental value.
• Cancellation of shares: in extreme restructurings, existing shares can be cancelled.

Dilution and cancellations can reduce equity to negligible value, effectively causing large losses for prior holders.

Can you lose more than you invest?

A central part of the question “can you lose stocks” is whether losses can exceed your original capital. The short answer: in certain situations, yes.

Margin accounts and margin calls

Margin trading lets you borrow from your broker to buy more shares. While this magnifies gains, it also magnifies losses. If your account equity falls below required levels, your broker issues a margin call and may liquidate positions to restore required equity. Forced liquidations can happen at unfavorable prices and may leave you owing money to the broker if proceeds don’t cover the loan plus fees.

Practical points:

• Margin increases the risk you can lose more than you invested.
• Brokers typically have maintenance requirements and can liquidate without prior consent.

Short selling and theoretically unlimited losses

Short selling involves borrowing shares and selling them now with the intention to buy them back later at a lower price. If the stock price rises instead of falls, a short seller faces losses as the buy-back price increases. Since a stock’s price can rise without strict upper bound, potential losses on a naked short position are theoretically unlimited. In practice, broker limits, forced buy-ins, and other controls reduce—but do not eliminate—this risk.

Derivatives, options, and leverage

Derivatives (options, futures, CFDs) can produce losses larger than the initial premium or margin if positions are leveraged or structured with asymmetric payoff. Examples:

• Buying options: maximum loss typically limited to premium, but selling (writing) certain options can create large or unlimited downside.
• Futures and perpetual-swap products: full notional exposure means price moves multiply gains/losses.

These instruments routinely allow losses beyond the initial cash outlay when used without appropriate risk controls.

Special considerations for retail investors

Retail investors should be aware of account type, broker protections, custody arrangements, and operational risks.

• Cash accounts: using only your deposited cash means you generally cannot lose more than the balance in that account (absent fraud or settlement failure).
• Margin accounts: increase risk of losses exceeding your deposits.
• Broker protections: in some jurisdictions, investor protection schemes (e.g., SIPC-style frameworks) may protect customers against broker failure up to limits — but they do not cover market losses.
• Settlement and custody risk: understand who holds the securities in custody and whether the broker rehypothecates assets.

Read broker terms carefully before trading. Always confirm the custody model and protection limits offered by your provider.

Crypto and digital-asset–specific loss mechanisms (comparison to stocks)

The question “can you lose stocks” extends naturally to crypto tokens. Many loss modes overlap with equities (market risk, insolvency, fraud), but crypto adds unique technical and protocol risks.

• Extreme volatility: tokens often move farther and faster than listed equities.
• Exchange insolvency: centralized exchange failures can freeze or lose customer funds.
• Private key loss: if you lose private keys to a self-custodial wallet you permanently lose access to the tokens — a kind of total loss not present in brokered equities.
• Smart-contract risk and rug pulls: poorly audited or malicious smart contracts can be drained, instantly rendering a token worthless.

Both markets can produce total loss scenarios, but the mechanisms often differ: insolvency and liquidation for corporations vs. code exploits and private-key failures in crypto.

Custody & private keys

Crypto custody has an important distinction: control of the private keys equals control of funds. If private keys are lost, stolen, or inaccessible, tokens can be irretrievably lost.

Retail options include:

• Self-custody (hardware wallets): user-controlled, reduces counterparty risk, but requires careful key management.
• Custodial wallets at exchanges: easier UX but introduce counterparty risk if the custodian is insolvent or compromised.

Bitget Wallet is an example of a custody solution built for both convenience and security. When using custodial services, prioritize regulated providers with clear custody safeguards and insurance where available.

Protocol risk, rug pulls, and smart-contract bugs

DeFi introduces risks absent from equity markets:

• Rug pulls: developers drain liquidity pools or token treasury.
• Smart-contract bugs: exploitable vulnerabilities can lead to large losses.
• Governance or token economics changes: protocol decisions or token burns can change value unexpectedly.

These risks can make certain tokens go to zero almost overnight.

Tax and reporting implications of worthless securities

When a security becomes worthless, tax rules in some jurisdictions allow investors to claim a capital-loss deduction. In the U.S., the IRS treats a security as worthless when it has no value and no reasonable expectation of recovery.

Key tax points (U.S.-centric):

• Worthless securities can be treated as capital losses for the tax year in which they become worthless. IRS guidance explains the timing and documentation needed.
• If a company emerges from bankruptcy with a reorganization plan that issues new securities, prior shareholders may receive something, changing the tax treatment.
• Keep records of purchase dates, cost basis, and documentation showing worthlessness (e.g., bankruptcy filings, liquidation notices).

Always consult a tax professional for your specific situation; this is explanatory information, not tax advice.

How investors lose money during market crashes

Market crashes amplify several loss mechanics.

• Forced selling and liquidity squeezes: rapid selling with few buyers can push prices far below fundamental values.
• Margin liquidations: leveraged accounts are hit first, producing cascade effects.
• Panic selling and behavioral biases: emotion-driven decisions can lock in large losses.
• Market microstructure issues: widened bid-ask spreads, circuit breakers, and settlement delays can impair orderly trading.

During sudden market stress, even diversified portfolios can experience substantial declines; timing and liquidity matter greatly.

Risk management and ways to limit losses

Answering “can you lose stocks” leads naturally to how to reduce that chance. These are risk-reduction techniques, not promises of profit.

• Diversification: spreading capital across assets and sectors reduces idiosyncratic risk.
• Position sizing: limit the share of your portfolio any single holding can occupy.
• Use cash accounts if you cannot tolerate margin risk.
• Avoid excessive leverage: leverage magnifies losses and can produce margin calls.
• Due diligence: research company financials, management, and sector risks.
• Use regulated custodians and verify custody protections: if you store crypto, consider hardware wallets or trusted custodial providers such as Bitget Wallet.
• Understand instruments: know the payoff profile of options, futures, and leveraged ETFs before using them.
• Stop-loss orders and limit orders: can help control downside, but they are not foolproof in fast-moving or illiquid markets.

Portfolio construction basics

Good portfolio practice reduces the chance of catastrophic loss:

• Asset allocation aligned with your time horizon and risk tolerance.
• Rebalancing periodically to maintain intended risk exposure.
• Holding a core of high-quality, liquid assets to buffer against market shocks.

Broker and counterparty risk management

Choose regulated brokers with clear custody arrangements and insurance where available. Understand the broker’s re-hypothecation practices and insolvency procedures. For crypto, prioritize providers with transparent security audits and proven operational controls; if custodying tokens with an exchange, verify whether custody is segregated and whether there is insurance for customer assets.

Bitget as a platform provides custody options and a dedicated Bitget Wallet; users should review Bitget’s custody model and available safeguards when deciding where to hold assets.

Practical examples and case studies

Real-world events illustrate how and why investors lose everything or more than they invested.

• Corporate collapses: in several high-profile bankruptcies, common shareholders were wiped out while bondholders and secured lenders recovered portions of claims.
• Margin-induced losses: during volatile sell-offs, accounts using high leverage have been liquidated and left with negative balances.
• Crypto hacks and rug pulls: smart-contract exploits and malicious token designs have made many projects worthless overnight.

These cases show how market, credit, and operational risks interact to produce severe investor losses.

Short interest, sentiment, and an example of market pressure (news snapshot)

Short interest data can signal market sentiment and influence price dynamics. As of January 15, 2026, according to Benzinga, several companies showed elevated short interest percentages of float. For example:

• Hycroft Mining Holding Corp had 4.16 million shares sold short, representing 8.22% of its float with an estimated 1.0 days to cover.
• CF Industries Holdings Inc reported 14.23 million shares sold short, or 10.88% of float, with about 6.63 days to cover.
• Red Cat Holdings Inc had 23.59 million shares sold short, representing 22.26% of float and about 3.09 days to cover.

(These figures are exchange-reported short interest metrics summarized by Benzinga.) Elevated short interest can indicate bearish sentiment and can increase volatility; it is one of many metrics investors monitor to understand market positioning. Note that short-interest statistics change regularly and should be verified with the latest exchange-reported data when making decisions.

Frequently asked questions (FAQ)

Q: Can a stock go to zero? A: Yes. If a company is liquidated and creditors exhaust assets, common shares can become worthless.

Q: Can I owe money if my stocks fall? A: If you trade on margin or have leveraged positions, you can owe money if the account equity becomes negative after liquidations and fees.

Q: How do I claim a loss for tax purposes? A: For ordinary market losses you report capital gains and losses per tax rules. For wholly worthless securities, IRS guidance describes timing and documentation. Consult a tax professional.

Q: Are broker or exchange failures covered by insurance? A: Some custodians offer insurance or participate in investor protection schemes; coverage varies by jurisdiction and does not protect against market losses or all types of operational loss.

Q: How is crypto custody different from stocks? A: Crypto custody depends on private keys. Losing keys or having them stolen typically results in irreversible loss. Using a reputable wallet or regulated custody reduces counterparty risk.

Further reading and authoritative sources

For authoritative, deeper guidance consult regulatory and institutional sources, including investor-protection sites and tax authority publications. Key types of references include regulator investor guides, tax authority publications on worthless securities, and reputable educational finance resources.

References

• Investor-focused education on stocks and shareholder risks (regulatory investor guides).
• Analyses on whether a stock can lose its entire value and impacts for long and short positions.
• Articles explaining what happens when a stock goes to zero and steps during bankruptcy and liquidation.
• Short-interest reporting summarized by market data providers (e.g., Benzinga short-interest summaries; figures quoted above are as of January 15, 2026, according to Benzinga).
• IRS guidance on losses and worthless securities for tax reporting.

(References listed as topic sources; readers should consult official regulator pages, broker disclosures, and the IRS for the most current guidance.)

Final notes and next steps

So, can you lose stocks? Yes — losses can be temporary or permanent, and in leveraged or short positions you can lose more than your initial investment. Understanding account types, custody arrangements, and instrument mechanics is essential. If you custody digital assets, prioritize secure solutions like Bitget Wallet and review custody protections on Bitget.

If you want to explore custody or trading options with a regulated provider, learn more about Bitget’s custody features and Bitget Wallet security practices to compare protections and operational controls. Stay informed, document transactions for tax reporting, and keep risk controls in place.

This article is explanatory and educational only. It does not constitute investment, tax, or legal advice.