Why Do Stocks Get Halted?

It is probably one of the worst feelings in the world. You own 1000 shares of a stock, and you hear that the stock has been halted. The absolute worst case scenarios race through your mind; you are certain that your investment is about to be flushed down the toilet.

Speaking in strictly percentage terms, normally a stock getting halted is not a good thing. Sometimes it can be a VERY good thing, but most of the time, you do not want to own a stock that has been halted. Let's look at some of the most common reasons for a stock to get halted, and why stocks are halted in the first place.

First off, why do stock exchanges halt stocks? It is because a major piece of news is about to be announced regarding the stock. The stock exchange wants to give people a fair amount of time to digest the information; they don't want major brokerages, who have access to the best and fastest information, being able to stampede out of a stock before the general public. They want the public to have an opportunity to digest the news before the stock is trading again.

The most common reason for a stock to get halted is if there is a really important piece of news coming out on the stock. Most of the time it seems as though this is bad news, but that isn't always the case. Let's take a company that has a drug in to the FDA for final approval. The stock may be halted while the FDA announces their decision, either good or bad. If they approve the drug, the stock will gap way up after the halt; if they reject the drug, it will gap way down.

Or, maybe a company is announcing that their CFO has been found to be embezzling funds from the company, and that there is an SEC investigation now ongoing. Most of the time, the stock will be halted to give the public a chance to digest the news.

In the rare case that an acquisition is announced during the middle of a trading day, the stock that is being acquired is usually halted. This exact situation happened to me once in the last 90's. I can't remember exactly what the stock was called, but I remember it was halted in the middle of the trading day, and I was expecting nothing but bad news. Fortunately, the news was that the stock was being a acquired at a substantial premium.

If a stock that you own is halted and announces decidedly bad news, it can be tempting to set a market order to sell for whenever the stock re-opens. Keep in mind though that normally this is the low of the day or close to it, as you will have thousands of people looking to do the same thing; selling out as soon as the stock opens. Market makers realize this, and will gap the stock down even lower to accomodate all of these sells. You would do well to wait for a few minutes and then enter your sell order, as usually you will receive a higher price for your shares.

Filed under: Stock Market Education | General Knowledge