Brief Definition
A share buyback, also known as a stock repurchase, occurs when a company buys back its own shares from the marketplace. Companies may initiate buybacks to return excess cash to shareholders, signal confidence in their own financial health, or to prevent other shareholders from gaining a controlling stake.
Further Explanation
A share buyback, also known as a stock repurchase, occurs when a company buys back its own shares from the marketplace. This reduces the number of outstanding shares, often leading to an increase in the value of remaining shares and earnings per share (EPS). Companies may initiate buybacks to return excess cash to shareholders, signal confidence in their own financial health, or to prevent other shareholders from gaining a controlling stake.
Example:
Suppose Company XYZ has 1 million shares outstanding, trading at $50 each. The company decides to repurchase 100,000 shares. After the buyback, only 900,000 shares remain outstanding. If the company’s total earnings remain the same, the earnings per share will increase because there are fewer shares among which to distribute the earnings. Additionally, the reduction in supply can lead to an increase in the share price.