A buyback (some people call it a repurchase) is when a company buys back (get it??) some of its outstanding shares, reducing the number of shares out there on the open market. There are a lot of different reasons that a company may want to buy back shares. They might be looking to increase the value of shares reducing the supply. They could also be looking to eliminate the possibility of a particular shareholder going for a controlling stake in the company.
A buyback is basically a way a company can invest in itself. When the amount of shares out there on the market are lower, the shares that existing stakeholders have are increased proportionally because the amount they own is now taken out of a lower number.
If a company feels its shares are undervalued, the can give their investors a return by buying back some shares and boosting the investor’s shares value because it increases the earnings that each share is allocated while also boosting the amount a stock is valued even if i has the same price-to-earnings ratio.
Another reason companies love a good buyback is for compensation. Companies often reward their employees and management with stock options and rewards. To make good on those rewards, they can buy back shares and give them to the people (AKA said employees and management). This helps to avoid diluting the stock for existing shareholders.
Buybacks can happen in two ways:
- Shareholders get an offer where they have the option to sell their shares in a certain amount of time at a rate higher than the current market price. This high price is what encourages investors to sell rather than hold onto their shares.
- Companies can also buy back shares just like anyone else on the open marketplace over a longer period of time. They can also outline a repurchase program that regularly buys back shares at particular times or intervals.
With this buyback, we are preventing mean Company X from taking us over and also making our investors love us.