Why do stocks get suspended, and how does this affect investors? In fact, the U.S. Securities and Exchange Commission (SEC) can decide to halt trading for a company’s stock due to a variety of issues and concerns.

Below, you’ll learn more about the SEC and the process behind its ability to intervene in the market. Moreover, there are a few famous examples of these suspensions in the recent past.

Why do stocks get suspended for a short time

Why Do Stocks Get Suspended?

Suspended trading can occur for many different reasons. Thus, it’s important to understand where this all began.

So why do stocks get suspended? This is possible due to the Securities Exchange Act of 1934. Specifically, under Section 12(k). This grants the SEC the authority to “issue summarily orders to alter, supplement, suspend, or impose requirements or restrictions…”

Now, what does the SEC consider a major market disturbance? This is where an investigation may take place for a variety of reasons. For example, a suspension may occur due to…

  • Inaccurate data and information that does not match up with periodic filing reports or isn’t up to date
  • Possible market manipulation or insider trading concerns
  • Public information, such as press releases, that displays inaccurate information
  • Fraud and other compliance issues.

During an investigation, the SEC will not notify you as an investor. This protects the integrity of the investigation as there’s a chance the suspension does not happen. Furthermore, if a suspension is in place, the stock will not sell, and there will be no bidding price.

How Long Can a Stock Be Suspended?

The length of a suspension comes on a case-by-case basis. However, federal laws generally allow the SEC to suspend a company’s stock for up to 10 trading days.

When the SEC decides to suspend trading, it will issue an order and announce the reasons and amount of time for its decision. Trading can be immediately resumed by exchanges such as the New York Stock Exchange (NYSE) and Nasdaq when a suspension is lifted.

However, following a suspension, the price of stocks may fall sharply since there may be a lack of confidence in management. Although, the price may quickly recover if the issues are resolved.

Stock Suspension Outlook

One question always leads to another. First, it’s why do stocks get suspended? Then it’s what happens next, and how does this affect the investors?

Once a suspension occurs, the SEC will distribute a press release detailing its reasoning. After this point, the SEC will not comment on the status of the investigation. Investors will not be able to trade any shares of the company’s stock until the suspension is over. Yet there are ways for suspensions to end early.

The most common reason behind a suspension is inaccurate financial information. Companies can resolve this issue by submitting financial statements that are up to date. This brings the company back into compliance, and the suspension will be over. Investors can resume trading immediately after a suspension ends on the New York Stock Exchange (NYSE) or Nasdaq.

Famous Stock Suspensions

Do you remember the Enron scandal? Also, did you know Amazon (Nasdaq: AMZN) stock was also suspended in 2018? Let’s do a deeper dive into these two famous suspensions.

In 2001, Enron stock fell off the map. Its stock price dropped below $1 to $0.26. For comparison, it was trading as high as $90.75 before the drop. Enron ended up declaring bankruptcy, and the NYSE suspended its stock.

For years, Enron was paying creditors billions of dollars and providing inaccurate financial information. Its accounting practices and financial filings were hiding its debt from investors. As a result, one of the largest companies in the world no longer existed.

Amazon stock, however, was suspended due to a technical issue. In late April 2018, the NYSE suspended Amazon stock, along with Booking Holdings (Nasdaq: BKNG) and Alphabet (Nasdaq: GOOGL), due to a “price scale code issue.”

This glitch caused stocks trading for more than $1,000 a share, specifically from the Nasdaq, to send trade execution reports in an unusual manner. So the NYSE’s response was to suspend these stocks for the rest of the day.

Why Do Stocks Get Suspended Today?

Market volatility is a cause for concern, but there’s always an opportunity to find the next big stock trend. Stocks that get suspended, on the other hand, are an unfortunate event that can disrupt any and all investors.

Always stay up-to-date about the companies that you invest in. If current, reliable information is not available, investors should consider if this is a good investment. This is where your research can make all the difference.