What is a share buyback? And How Do Buybacks Work?
I just read a very interesting story in which a shop owner loved his products so much that he went back to his customers and bought them all back.
I’m sure this sounds very strange to you but in the stock market, it happens quite often. This process is called a share buyback.
So today, let’s discuss what is share buybacks.? what is the purpose of these buybacks? And what are the different ways this can impact the shareholders and the company?
What is a share buyback?
So, what actually is a stock buyback? They’re exactly what the name says. A company buys its own shares back from its shareholders.
what is the purpose of these buybacks?
Buyback either permanently removes them from circulation or retains them for resale to the market in the future. Decreasing the total shares of stock outstanding increases the ownership stake that each remaining share of stock represents; this increases the value for shareholders.
How Do Buybacks Work?
Stock buyback plans are often proposed by executives and authorized by a company’s board. But announcing a planned buyback does not always mean it will occur. In some cases, the target share price a company selects may not be met, or a tender offer may not be accepted.
Types of Buybacks
There are two types of buybacks: open market and tender offer.
Open Market
Companies may repurchase shares on the open market at prescheduled times or when management feels it is the best use of capital.
Tender Offer
In a tender offer, the company offers to buy back its shares. This is often at a higher price than what the shares cost on the open market
Buyback Criticism and Drawbacks
Companies are often criticized for share repurchases. I am really not a fan of buyback. Generally buyback happens during bullish market cycle and companies will offer to buy shares at the price over well above the CMP. This doesn’t make any sense.
Just think logically, why would someone buy something above market price? Logically it doesn’t make any sense. But buyback has a feel good attribute and creates a buzz and positive vibes, which is why some companies opt for it.
A good company should never buy back shares in bullish market at an elevated price and should opt for buyback during bear market, when price is depressed. But this never happens in reality.
Sometimes, company might decide to buyback all it’s shares from open market and decide to go back to a private unlisted organization. In such cases, if you don’t offer your shares during buyback, then you would be left holding the unlisted illiquid shares of the company. So that is something you should consider as well while making decision on buyback offers.
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