Share or Stock buyback refers to the process of buying back own shares by the company through an open market. The purpose of doing this is to gain back the previous shares to increase the existing values of the company.
This can lead to increased stocks and provide the companies with higher value to sell the stocks. However, there are several other factors driving the companies to buy their shares back.
Let’s look into the details of share buyback with the definitions, works & significance in this article.
Definition
Companies buy back or repurchase the shares to gain the control of the shares from the existing shareholders. So, ultimately buying back the own shares existing in the stock market by the corporate or body of individuals is known as share buyback.
It is also important for businesses to reduce the number of shares in the stock market and establish new corpus to tackle emergencies.
Below are some key factors driving companies to buy stock shares back from the market:-
- Raising capital and using the stock again to get the best value.
- Additional shareholding would ensure more power to stand in a robust financial standing in the market.
- To make undervalued shares awarded for valuation as a last resort.
- It becomes tax-friendly for both the shareholders and corporations. The amount is taxed only for DDT before the value is distributed to the stockholders.
Works
The process of share buybacks typically begins with the company making and announcement about the intention to refreshers’ a certain number of shares. A broker or then Investment Bank on behalf of the company executes the buyback, which may take over a period of time.
Once the shares are broad, back the company may choose to retire and hold them as treasury shares. Retiring dishes reduces the number of outstanding shares permanently while holding the shares as treasury shares can provide the company with flexibility to reissue the shares in the future.
The process involves various benefits to the company and the shareholders including returning value to shareholders, preventing hostile takeover, boosting investor confidence and signaling that the shares are undervalued.
Significance
There are number of significances of buying back shares from shareholder that affect the share price:-
- Increase in Earnings Per Share (EPS):- When a company buys back its own shares, the number of outstanding shares mainly increases the earnings per share (EPS) of the remaining shares. This indicates that the company shares will be more attractive to investors and potentially to increase in the share price.
- Return Value to Shareholders:- The share buybacks can also be a way for companies to return value to their shareholders. By reducing the number of outstanding shares the remaining shareholders have a higher percentage ownership in the company that increases the value of their shares.
- Flexibility in Capital Management:- Share buybacks can provide companies with flexibility in their capital Management. By buying back their shares, a company can use available cash reserves to invest in growth opportunities to pay down death or distribute dividends to shareholders.
- Instilling Confidence in Market:- Share buybacks can instill confidence to the market of its financial position and growth prospects. This can boost investor confidence in potentiality to an increased share price.
Conclusion
Share buybacks can provide a company with a number of benefits, as well as to the shareholders. The market can gain confidence of the specific shares and the latter would be increased in their share prices giving a boost to the market
