Key Takeaways

  1. When a company purchases its own shares at a higher price than market value, it’s called a buyback.
  2. Companies invest in themselves and increase their own investment proportion via buyback offers.
  3. It is a way of returning excess cash to shareholders.

Buyback is a strategy in which a company or firm buys its outstanding stocks, reducing the number of its shares available in the open market. It is also called share repurchase.

Buyback meaning / Buyback of shares meaning

If a company wants to raise capital or funds, it will issue shares. But if they have excess funds or high profitability or reserves are increasing. The company offers buyback shares at a higher price than the market price. Through buyback, companies invest in themselves and increase their own investment proportion. By reducing the number of outstanding shares, the share repurchase increases the value of each share as a proportion of the firm. Thus, as the price-to-earnings ratio (P/E) declines or the stock price rises, the stock’s earnings per share (EPS) rise. Buyback generates higher confidence in the investor by showing that the company has enough capital for zero hours.

Buyback benefits / Why would a company buy back its own stocks

  1. It another way of reduction in capital
  2. It improves the company’s earnings per share
  3. It is a way of returning excess cash to shareholders
  4. If the company wants to raise return on equity and return on the net worth, they use buyback method
  5. When shares are undervalued via buyback company offers supplementary exit course for shareholders
  6. To reduce chances of takeover bids
  7. In the case of slow market conditions via buyback offerings, companies strengthen their stock prices.

Know more

Buyback reduces the supply of shares available in the secondary market as a result of which the price of each share increases (provided a constant PE ratio is maintained). Buyback is also employed to prevent other shareholders from claiming a controlling stake.