To make profitable investments in the stock market, you first have to understand the fundamentals of stock investing. This includes understanding its terminology.
It’s not only important to understand each term; it’s important to understand how these terms can affect your investments, where your hard-earned money is on the line.
One example of this is the term stock halt. It may seem obvious what it means, but there’s more to it than meets the eye.
What does a stock halt entail? Why does it happen? And how does it affect your investment strategy? What can you as an investor do in response?
We’ll answer each of these questions, and more, in this article.
What is a Halted Stock?
A halted stock — also known as a trading halt — is when a particular security that can not be traded in stock exchanges for a specified period of time. No broker or investor may buy or sell this stock until the halt is lifted.
This event is rare, yet there are several reasons that it can occur (more on these later).
When something causes a stock to be halted, the share will announce the fact to the market and traders. If the stock is traded at multiple exchanges, the halt stands across all of these markets. The halt will be given a code dependant upon the circumstances:
Stock halts are put into place to protect investors, giving an opportunity for everyone to be caught up on any news, while eliminating (or at least stymying) the opportunity for illegal transactions.
5 Reasons a Stock is Halted
Next, we’ll look at the 5 main reasons that a stock is halted.
Reason #1: Important Information (Either Positive or Negative) is Released Regarding a Company’s Services or Product
In this scenario, a stock halt is put into place because some big news is leaked, released, or just about to be released.
It can either be good or bad news…a major scandal or a huge breakthrough.
Either of these can affect trade through a plummet or an uncontrolled rise. A halt is used to give the market time to digest the results of the story.
A news-pending halt is the most common regulatory type.
An example of this kind of a stock halt can be found earlier this year. The global viral nanomedicine giant NanoViricides (NYSE: NNVC) was put on a “news pending” halt due to their imminent development of both oral and pediatric drugs that may be effective against COVID-19 variants.
When the success of the drug was leaked, the stock began to skyrocket. The halt was put into place to get some perspective on this now volatile stock.
Reason #2: A Major Corporate Transaction
When a major change occurs in a corporation, this may have a significant impact on the stock. This can include things like restructuring, merger, or acquisition.
These events can cause an imbalance in the smooth system of market trade — something that the market very much wants to avoid.
For instance, Johnson and Johnson is in the process of splitting its company into two separate entities: a consumer products division and a pharmaceutical and medical device operation. Since the news was released, stock shares have gone up. When the transaction occurs, there will be a stock hold while a price is set for the new companies.
Reason #3: Important Changes to a Company’s Financial Health
Another change that can prompt the market to halt a stock is a drastic change to a company’s financial health.
The market wants to protect itself against accusations of investors losing money. Therefore, when a corporation takes a large financial hit, they will halt a stock to allow time for the news to settle and for investors to get on the same page.
When we talk about changes to company financial health, it doesn’t necessarily mean negative changes, either.
GoHealth (GOCO) securities were halted because the company has had a large uptick in profit, and will be moving into interstate sales. This created large interest in trade, and the stock was halted as a result.
Reason #4: New Regulatory Developments that Can Affect a Company’s Business
Many industries and sectors are controlled by a series of regulations that affect how they work. These regulations for a particular industry are subject to change via government or private industry intervention.
While new regulations may be very much to the benefit of the company, they can also create a temporary hindrance while they’re set into place. Or the opposite can be true: that regulations are known to likely have a negative impact on the business, and there is a major dip in securities expected because of it.
Either way, a stock halt can be placed as new regulations take into effect.
Reason #5 Undue Influence
There is also an unusual and rare scenario for a stock halt and we saw this one not too long ago with GameStop — the notorious GME trading halt.
A social media campaign manipulated the price of stock. A group of Reddit day traders mass-purchased stock for the company, causing mass appreciation — securities went up 70% over a day).
In this case, the market halted trade to put a pause on the buying frenzy.
The Bottom Line: Halted Stocks
While it can make investors nervous, a stock halt is not aren’t necessarily a good or a bad thing — and they are just as likely to be triggered by good news as bad.
The important thing is to understand what a stock halt means for your investing strategy.
This event is meant to be used as a pause for an investor to take stock of their situation. In a frenzied atmosphere like trading, an enforced pause can help bring a bit of perspective to decision-making as a whole.
