Share Buyback

A share buyback or repurchase involves a company re-acquiring its own shares. This is a common and flexible way of helping return to shareholders.

Share buybacks have developed into popular techniques, alongside stock dividends, by companies that are looking to inject funds directly to shareholders.

Listed companies are able to simply repurchase its own stock, for a small sum of its outstanding equity, whereby reducing the number of outstanding shares.

In doing so, these shares are available for re-issuance. There are however rules that must be adhered to depending on jurisdiction.

In the United States for example, there are six available stock repurchasing methods, with an open-market method constituting over 95% of these.

This technique entails a given company announcing a buyback program and then repurchases shares on a stock exchange.

Stock repurchasing has become more popular over time, having now developed into a typical engagement with shareholder across worldwide markets.

This practice does present an inherent loophole for insider trading, namely amongst company executives.

Insider trading is defined as the illegal trading of a company’s public stock based on non-public information about a company.

However, within the context of stock repurchasing, this is technically legal and not a sizable risk for the purposes of regulatory authorities.

Share Buybacks Explained

Share buybacks are the best alternative to dividends that companies can rely on.

For example, when a given company repurchases its own shares, it helps to reduce the number of shares held by the public.

This material decrease in publicly traded shares indicates that even if profits remain the same, the earnings per share increase.

Should a share buyback occur when a company's share price is undervalued, this will benefit non-selling shareholders or insiders, possibly taking value from shareholders who sell.

Market research suggests companies are able to consistently profit from repurchased shares when the company is widely held by retail investors who are smaller retail traders and more likely to sell their shares to the company when those shares are undervalued.

The inverse is a company whose shares are primarily held by insiders or institutional investors, making share repurchasing less profitable.