Buyback

Published Aug 3, 2023

Definition of Buyback

A buyback, also known as a share repurchase, is a corporate action in which a company buys back its own shares from the market. That means the company buys back its own shares from shareholders, reducing the number of outstanding shares and thus increasing the ownership stake of the remaining shareholders.

Example

To illustrate this, let’s look at a hypothetical company ABC Inc. ABC Inc. has 1 million shares outstanding and each share is currently trading at $10. Now, the company has decided to buy back 200,000 of its own shares. That means the company buys 200,000 shares from the market at $10 per share. As a result, the number of outstanding shares is reduced to 800,000 and the ownership stake of the remaining shareholders is increased.

Why Buybacks Matter

Buybacks are an important tool for companies to increase shareholder value. By reducing the number of outstanding shares, the company increases the ownership stake of the remaining shareholders. This, in turn, often leads to an increase in the stock price, because the earnings per share (EPS) increase.

In addition, buybacks can also be used to signal to the market that the company is confident in its future prospects. That means, if the company is willing to invest in its own stock, investors may be more likely to invest in the company as well.