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.