Distressed Securities

Definition: A distressed security is one of a company that is currently in bankruptcy or near it.  It can refer to common stock, preferred stock, or corporate debt.Distressed security investors are often big hedge funds that one to affect change at the company.  They'll buy up lots of debt and equity cheaply, try to gain seats on the board, and then kick the management out and/or sell the company off.

Advice: For the common investor without much capital, distressed investing is a very risky strategy.  When a company goes bankrupt, its equity becomes worthless.  It's a strategy that's better reserved for experienced hedge funds and private equity funds.

Jonny Boy said:

Jodi - I have this as my definition from college - A company that appears to be financial trouble, whether it is in a situation of default on debts, in the process of bankruptcy, or restructuring to try to circumvent a pending issue of insolvency, would be considered a risky financial venture at best. Because there is reason to suspect that the management is less than effective there is a possibility that the company may not survive the current financial crisis. The securities then regardless of what the purchase price was would be totally worthless if the company failed. As a result these securities as either bonds or bank debt are said to be distressed securities.