Determining Stock Price
In particular, the value of a stock is calculated by the fundamental relation between supply and demand. If a lot of people want a stock (a high demand), then the price will increase. If there are many people who don’t want a stock (demand is low), then the price will decline.
Lastly, if the demand for a stock drops drastically it will lose a great deal (if not all) of its value. The key factor deciding a stock’s demand is the price of the company itself.
If the company is fundamentally strong and if it generates positive income, it is less likely that its stock will lose value.
So, while stocks carry some risk, it would not be fair to assume a loss in the value of a stock is entirely arbitrary. There are other factors that guide businesses to supply and demand.
Impact on Long and Short Positions
For a long position, the consequences of a stock losing all its value would be different than for a short position.
Of course, someone holding a long place (owned by the stock) hopes the investment will be appreciated. A price drop to zero means that the investor loses all of his or her investment – a return of -100%.
Conversely, the best possible scenario for an investor holding a short position in the stock is a complete loss in the value of a stock. Since the stock is worthless, it is not necessary for the buyer to hold a short position to buy back the shares. And then, sell them to the lender (usually a broker), which ensures that the short position earns 100 percent sold.
To summarize, indeed, the entire value of a stock can be lost. However, depending on the position of the investor, either good (short positions) or bad (long positions) can be the fall to worthlessness.