A company you’ve invested in has announced it will be purchasing back $9 billion worth of stock.
What does this mean for the average person invested in this company?
If you’re a new investor trying to figure out what all this financial mumbo jumbo means, you’re not alone. In fact, many people find it difficult to understand what happens when a company buys back its own shares.
Hopefully, this post will clear things up for you – we’ll be breaking down what a company buying back shares means for you and your investment, and also explore some reasons why a company might choose to buy back its own stock.
What Does It Mean When a Company Buys Back Its Own Shares?
When a company buys back its own shares, it means that the company is using its own cash reserves to purchase outstanding shares (i.e. stocks owned by the shareholders but not the company itself) of stock from investors.
Why Would a Company Buy Back Its Own Shares?
There are a few reasons why a company might choose to buy back its own shares:
To Increase the Value of the Remaining Shares
When a company buys back its own shares, it reduces the number of outstanding shares in the market. This, in turn, increases the value of each individual share because there are now fewer shares available.
For example, metrics such as Earnings-Per-Share (EPS) and Price-To-Earnings (P/E) ratios will look better because there are fewer shares to divide the company’s earnings by.
This usually leads to an increase in the stock price as investors are willing to pay more for each share – which is beneficial to existing shareholders.
To Repurchase Shares at a Lower Price
Sometimes, a company (much like you would as an individual investor) might buy back its own shares when the stock price is low in order to “repurchase” them at a cheaper price.
By doing this, the company can then sell these shares back into the market later when the stock price has recovered and make a profit.
To Prevent a Hostile Takeover
A hostile takeover occurs when another company or group of investors tries to take over your company by buying up a majority of the shares.
If a company is worried about this happening, it might choose to buy back its own shares so that it can maintain control over the company.
What Does This Mean for You as a Stock Investor or Trader?
If you’re an investor or trader in a company that has just bought back its own shares, here’s what it means for you:
The Stock Price Might Increase
As we mentioned earlier, when a company buys back its own shares, it can lead to an increase in the stock price. This is because there are now fewer shares available in the market, which makes each individual share more valuable.
If you own shares of a company that is buying back its shares, you might see the value of your investment increase.
The Company’s Financial Situation Might Improve
If a company is in good financial shape, it might choose to buy back its own shares as a way to reinvest its profits and make the company even stronger.
This can be beneficial to long-term shareholders as it can lead to an increase in the stock price and potentially higher dividends in the future.
You Might Be Able to Sell your Shares at a Higher Price
With the company’s financial situation maybe improving and the stock price potentially increasing after an announcement to buy back its shares, you might be able to sell your shares at a higher price once the company has announced its plans to buy back shares.
A Company Buying Back Shares Is Generally A Good Thing For Shareholders
So there you have it – a brief overview of what it means when a company buys back its own shares and how it might affect you as an investor or trader.
The next time you hear a company is buying back its own shares, you’ll know exactly what it means and how it might affect your investments.
It’s generally a good thing for you if you’re already holding on to it when the announcement is made 🙂
Terry
