What Stock Buybacks Mean to Investors
Also called a share repurchase program, wealth to the shareholder by purchasing of its own . A buyback is generally conducted in one of two ways: buying in the open over time or tendering an to existing shareholders to buy at a fixed price. Most commonly the company repurchase of its through the open .Âbuybacks are a way a company returns
There are many reasons a company may wish to begin abuyback program. One may be that the company sees its as a real value opportunity and wishes to purchase them while they are cheap. Any major can serve as a value investor just as you or I can. A company expecting its price to rise may believe that the best use of its is a major buyback.
A third reason is to reduce the dilution of its shares that happens when new shares are created. Dilution can be caused by stock option plans, secondary offerings, convertible bonds or preferred shares, and they often increase the overall number of shares available and decrease the company's per share growth over time.
Finally, a company may choose to implement a stock buyback program to cover up a poor performance. Investors use financial ratios to help makedecisions, and a major stock buyback reduces the number of shares available, creating more attractive financial ratios.Â
When a stock buyback occurs, most investors stock split or a dividend increase, but there are subtle ways in which the investors are affected. Since a buyback reduces the overall number of shares available in the open market, in theory, your stock should be worth more in the long run.not see any substantial change in their stock ownership levels or paid to them as they would through a
Another way in which the common shareholder can benefit is through the price support that a major stock repurchase plan provide. For example, in a down market this kind of buyback provide major support for the price of a stock and should help investors feel more secure about their positions.Â Â
Whether a stock buyback means that the stockappreciate in the coming months or years is certainly a disputed question. Through the years, buybacks have proved to be beneficial to a stockâs price in the short-term because the program generally draws investors to the shares. And that the company is making large purchases help the price of the stock. The part that is much less clear is the overall effect on the long-term returns of a stock. Over the long run there has not been any hard data to point to a direct correlation between a stockâs price movements and a stock buyback program. The is that a stock buyback often help in the short run, but the long-term typically be affected more by other catalysts.
Stock buybacks are a fairly common occurrence, although the condition of the overall market usually factors into just how much a is willing to repurchase. For the average investor, one of the most frequent questions is: "Is the stock buyback program a positive or a negative for the stock I own?" Typically it's positive, but a more concrete answer can only be determined on a case by case basis.