Stock Buyback

Definition

A company buys its own outstanding shares from the open market.

Tax Benefit

Allows stockholders to legally reduce taxes on capital gains instead of dividends.

Key Purposes

Increase value of remaining shares, boost earnings per share (EPS), reward shareholders, prevent hostile takeovers, reduce dilution from employee stock options, signal stock undervaluation, return capital to shareholders.

Also known as

Share repurchase

Common Methods

Open market buybacks, fixed price tender offer, Dutch auction tender offer, direct negotiation with shareholders.

Primary Action

Reduces the number of outstanding shares.

Financial Effect

Increases relative ownership stake of remaining investors.

Potential Downside

Can be viewed as market manipulation if not used prudently; can destroy value if executed at inflated prices or at expense of business investment.

Learn why companies repurchase shares, explore the benefits, risks, and strategies of stock buybacks, and understand how they could impact your investment portfolio.

Share repurchase, also known asshare buybackorstock buyback, is the reacquisition by acompanyof its own shares.[1]It represents an alternative way of returning money to shareholders instead ofdividends.[2]Repurchases allow stockholders to legallyredu...

When a company is sitting on excess cash, there are several productive things it can do with the money...

Investing in companies with a history of repurchasing their shares is a strategy that may be well-positioned to emerge stronger from market volatility.

A stock buyback is when a company buys its own shares on the open market. Learn about stock buybacks and how they affect financial ratios and stock value.

Share repurchase, also known as share buyback or stock buyback, is the reacquisition by a company of its own shares. It represents an alternative way of returning money to shareholders instead of dividends. Repurchases allow stockholders to legally reduce taxes, where instead of paying tax on dividends they pay the lower taxes on the capital gains when selling the stock, whose price is now proportionally higher because of the smaller number of shares outstanding.

A stock buyback is when a company repurchases its own stock, reducing the total number of shares outstanding. In effect, buybacks “reslice the pie” of profits into fewer slices, giving more to remaining investors. A stock buyback is one of the major ways a company can use its cash, including investing in its operations, paying off debt, buying another company and paying out the money as a dividend to investors. [...] To undertake a stock buyback, a company typically announces a “repurchase authorization,” which details the size of the repurchase in terms of the number of shares it might buy, a percentage of its stock or, most typically, a dollar amount. A company may use its own cash or borrow cash to repurchase stock, though the latter is usually riskier. [...] Stock buybacks can create value for shareholders if they’re well-timed and the company has enough cash on hand to afford them. Stock buybacks, also known as share repurchases, can destroy value if they’re executed at inflated prices or at the expense of business investment, which can harm shareholders in the long run.

A stock buyback (also known as a share repurchase) is a financial transaction in which a company repurchases its previously issued shares from the market using cash. Since a company cannot be its own shareholders, repurchased shares are either canceled or are held in the company’s treasury. Either way, the shares are no longer eligible for dividend payments and lose their voting power. ### Reasons for a Stock Buyback [...] A stock buyback occurs when a company buys back all or part of its shares from the shareholders. Common reasons for a stock buyback include signaling that the company’s stock is undervalued, leveraging tax efficiency, absorbing the excess of the shares outstanding, and defending from a hostile takeover. Open market buybacks, fixed price tender offer, Dutch auction tender offer, and direct negotiation with the shareholders are four methods of stock buybacks. ### What is a Stock Buyback? [...] Stock buyback methods involve reducing the number of shares outstanding and raising the price for the remaining shares. Similar to dividend payments, stock buybacks can be used to distribute invested capital back to the shareholders. ### Summary

## What Is a Stock Buyback? A stock buyback occurs when a company buys back its shares from the marketplace with its accumulated cash. Also known as a share repurchase, a stock buyback allows a company to re-invest in itself. The repurchased shares are absorbed by the company, reducing the number of outstanding shares on the market. Because there are fewer shares on the market, the relative ownership stake of each investor increases. [...] A stock buyback occurs when a company buys back its shares from the marketplace. The effect of a buyback is to reduce the number of outstanding shares on the market, which increases the ownership stake of the stakeholders. A company may buy back shares because it believes the market has discounted its shares too steeply, to invest in itself, or to improve its financial ratios. Share buybacks can help companies reduce the dilution caused by employee stock option plans.