Stock Buybacks

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.