Stock Buybacks
Date Added: January, 2001
By Chris Stallman
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If
you've been following the market lately, you've probably
been hearing a lot of news about "stock buybacks". The
strategy has been around for a while but they're making the
news more and more lately.
The idea
behind stock buybacks is really pretty basic. In fact, the name
pretty much explains it. It's when a corporation decides to
buy shares of their own stock back from the public on the open market.
The reasons a company might decide to repurchase their
shares of stock anytime after their offering varies. It could be
because the company has grown considerably and has stronger cash
flow and feels that buying shares of their own stock may result
in a higher rate of return than any other investment. Although the
reasons vary, the main reason is usually because management feels
that the shares of their stock are undervalued, at least when they
consider where they are going.
When a
company makes the decision to buy back a large quantity of their
own shares, it means that they are very confident about the future
of the company. In this day and age, investors are always looking
for "signs" that show a company's stock is worth buying
and when they see that management of a company feels that their
stock is undervalued, they take it as a positive sign.
Also, when corporations buyback their own shares that
they originally offered to the public, it results in less shares
outstanding. It's usually beneficial for shareholders when there
are less shares outstanding because the earnings per share might
increase even if the actual amount that the company is earning doesn't.
It also means that the earnings per share might be likely to rise
faster in the future.
Although stock buybacks are usually very positive signs
for a company, no one can be expected to always be right. There
is still the risk of the stock price declining. If you own shares
of a company who issues a large buyback, you might want to hold
them longer because of the positive outlook for the company. If
you're looking to invest in the company, I'd still encourage
you to research all aspects of the company on your own to make the
best decision, rather than just buying the stock because the company
is too.
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