Though not all companies adopt stock buyback, it is still possible for them to request one. In this post, you will learn about the reason(s) companies repurchase their shares and the meaning of stock buyback.
What is the meaning of stock buyback?
Share buyback, stock repurchase or stock buyback, they all mean the same thing. Shares buyback is the decision of a company to repurchase or get back their shares from investors. It might be from the open market or straight from shareholders.
It might appear strange that a company that was once looking to raise money and opened doors to investors is now moving to get its shares back. It is surprising, but note that there are reasons why a company would decide on such moves.
But before we jump into that, I know many would like to ask if they have the power. The answer is yes! Companies have buyback rights on all their shares including vested shares.
Why do companies buy back shares?
There are several reasons a company may decide to request a buyback on all or most of its shares. Let’s examine them one after the other.
Boosting of undervalued shares
A company can initiate a buyback just to show that its undervalued shares are not properly discounted. However, taking such decision to buy back those shares will boost investors’ confidence and prove that the company has fate in their shares.
Increase share earnings
A stock buyback is also an opportunity for investors to earn more. Let’s look at it from this angle; the company has bought back most of the shares with only a few remaining. So, annual earnings of shareholders will increase because the number of those that bought shares has reduced. Stock price will also increase because there will be a higher demand.
Lower cash outflow
The higher the number of shareholders, the more money the company has to pay out annually. So the logic is that with fewer shares, they can save more. So, they move for buybacks.
In line with the shareholder’s decision
A shareholder might be looking for how to sell his shares to raise money, and the issuing company might step in. It is another way in which share buyback happens.
Wrapping it up
Share buybacks are beneficial to the company and shareholder. And as you can see, there are many reasons companies take such decision. We hope you have understood what share buyback means and why companies buy their shares back by reading this post.