How finance folk use it
As the name suggests, a stock buyback (also known as a share repurchase) is what happens when a company tries to buy its stock back from shareholders.
Is it good or bad?
A stock buyback can be done by the company if it would rather use its allocated capital to acquire more of its own shares instead of fund growth. This is a way for it to return profits to shareholders instead of the traditional dividend payments.
A company may also perform a buyback if it sees the market pricing its shares at a discount compared to their recognized value. Investors usually see this positively, as this shows the company’s confidence in its own shares.
Since the company buys back the shares to either cancel them or hold them as treasury shares, the number of outstanding shares decreases. This increases the relative ownership stake of each of these shares.
A stock buyback also increases earnings per share (EPS), which is the part of a company's profit assigned to each outstanding share of common stock. When the EPS rises, the market value of the remaining shares does too. The EPS is one way to measure a company’s profitability, and it shouldn’t be confused with dividends.
A buyback happens in one of two ways. In the first, shareholders receive a tender offer from the company. This is a request for them to submit (or "tender") some or all of their shares for sale.
The offer includes the number of shares that the company wants to repurchase, and how much it will be offering per share by a certain date. Interested stockholders will have to reply to the offer with the number of shares they are willing to sell at the offer price.
The second way a repurchase can happen is through the open market at the market price. Here, the company doesn’t contact shareholders directly.
A stock buyback doesn't automatically mean that the company wants to repurchase all of its shares. In most cases, it sets a certain number of shares as its target.
What it means for you
If a company tries to buy some of its shares back, that could be a good opportunity for you to sell at an acceptable price. Remember, though, that there is no guarantee that a stock buyback will happen, and so there is no way to plan for one.
