Don't Gamble on GM Stock

When retailer Kmart emerged from Chapter 11 in 2003, 91 million shares of stock changed hands before trading in KMRTQ was canceled. A similar thing happened when US Airways was exiting bankruptcy protection. Its stock, too, was canceled. Many investors holding the pre-bankruptcy stocks were embittered. But there was plenty of warning. They failed to understand how corporate bankruptcies work.

If you go to the Pink Sheets Web site (www.pinksheets.com), and look for GM stock information, you'll see a box with the word "Warning" in red with a link to the Securities and Exchange Commission's Web site with information on corporate bankruptcy. It's a caution that all such stock contains.

The SEC's warning reads, in part: "Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's plan of reorganization will cancel the existing equity shares."

This is the downside of being a shareholder. As GM pointed out to investors on its informational Web site about its bankruptcy filing (www.gmcourtdocs.com), the bankruptcy code is clear in how it treats stockholders. They're last in line for any claim. Owners of a company under bankruptcy protection may not receive anything if the secured and unsecured creditors' claims are not fully repaid.

There are some people who are selling GM stock to perhaps lock in their losses for tax-deduction purposes. But others are just gambling.

There are lots of day traders and short-sellers who may be buying and selling the stock, trying to drive up the price until the stock is canceled. Day traders try to profit by buying and selling stock quickly. Short-sellers borrow stock and sell it, with the hope that they can later buy it back at a lower price, return it to the lender and pocket the difference.

I'm giving you fair warning. If you load up on GM stock now thinking you may still profit if the company emerges from bankruptcy, you'll end up with the shareholders' equivalent of a lemon.

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