While stock repurchases are not always initiated with the best of intentions, there are actually a number of valid reasons why a business might decide to offer one to its shareholders. Stock buyback happens when a company purchases its own stock, either on the open market, or directly from its shareholders; it's known as a "share buyback", or "stock repurchase".

Generally when this happens, the company will absorb or retire these repurchased shares, and re-name them treasury stock.

Share buybacks are commonly used to create or enhance shareholder value in a number of different ways. A stock repurchase plan can be a good way for a business to reinvest in itself, by using any excess cash at its disposal to buy back shares of its own stock.

When a share buyback is announced, stock prices tend to shoot up accordingly as investors rush to take advantage of the higher demand and lower supply situation. So how do stock buybacks work? There are three main ways that a company can implement a share repurchase:.

The most common stock buyback approach is through the open market. In this case, a company simply buys its own shares at the current market price, in much the same way that you would do as an individual investor. A stock repurchase of this type usually involves paying shareholders a share price that is significantly higher than the current market value. When a company offers to buy back shares of its own stock from its shareholders, it effectively removes those shares from circulation.

Quite often, a company will use a stock buyback to pump up the price of its shares when it believes they have become undervalued in the marketplace. Share buybacks are often used to provide current shareholders with a cash distribution, and this is viewed as a bonus by many investors. This can be a distinct disadvantage if you are an investor who chooses to hold onto your stocks for the long run. On the plusside however, a share repurchase often results in a stronger stock price.

One of the main ways a stock repurchase can improve your investment value is through an increase in Earnings per Share EPS. This fact is based on a simple mathematical formula.

If a company removes some of their outstanding shares from the marketplace by buying back stock, it means that their annual earnings will be distributed among fewershares, and that each of those shares will be entitled to a greater portion of those earnings.

Furthermore, a rising EPS is often linked to an increase in stock price, providing even greater investor value, since there will be a higher demand for a stock that is seen to be growing its earnings. Share buybacks provide a viable way for companies to reduce their cash outflow, without actually having to cut their dividends. Fewer outstanding shares mean fewer dividends to be paid, and a business often stands to save a significant amount of money when this difference far outweighs the cost to repurchase the shares.

Capital structure is the way in which a business funds its growth and operation, generally through a combination of debt and equity.

S&P Companies Buying Back the Most Stock Include Juniper Networks (NYSE: JNPR), CBS (NYSE: CBS) - 24/7 Wall St.

When a company initiates a stock buyback, it effectively changes its capital structure, because fewer outstanding shares equates to less outstanding equity. Sometimes a large shareholder or seller of a specific stock is looking to liquefy their holdings, and the stock-issuing company may offer to buy back their shares from them.

Initiating a stock buyback is generally a smart way for a company to make use of any excess cash it may have, particularly if it finds its stock has become undervalued in the marketplace.

Stock Buyback Programs and How They Work

But as a value investor, you should never assume that every business out there has your best interests at heart.

Unfortunately, not every stock repurchase scenario is a positive one. Developing an understanding of these worst-case scenarios will help to protect your portfolio from the disastrous downside of a buyback gone wrong. While an increased EPS is generally considered to be a good thing where shareholders are concerned, initiating a share repurchase for the sole purpose of hiking up earnings is not a wise business practice.

Would you be surprised to learn that share buybacks are sometimes undertaken for the sole purpose of lining the pockets of company executives? Key management personnel are often compensated by way of stock options. And while the intention behind this perk is positive, since it results in managers becoming personally invested in the performance of the businesses they run. The potential downside is that many executives will use stock repurchase plans to maximize their returns, by keeping outstanding shares down, and EPS up.

Now and then, taking on debt to support a share repurchase plan may serve another intended purpose. When a company is under threat of a hostile takeover, it may use this buyback approach to try and prevent such an event by:. In either case, this type of share buyback scenario represents a desperate defensive measure that simply does not support the best interests of the shareholder.

Sometimes a stock buyback is a frantic attempt to offset poor performance or a difficult economy, or it may even be a last-ditch effort to save a floundering business. You should also watch for companies that use stock repurchase announcements to try and lift the price of their stock, without actually following through on their plans.

Share buybacks: What they are and why they may not work - Business Insider

Now you understand exactly why companies buy back stock and how this practice can help boost the stock prices and increase shareholders' value.

A stock buyback is meant to be a positive investor event that can help to increase the value of your shares. Like so many other investment events, share buybacks can turn out to be either a good thing or a bad thing for investors, depending on the circumstances.

Corporate Stock Buybacks for Investors - dummies

There are a number of situations where companies may choose to buy back their shares for all the wrong reasons. At the best of times, this decision will be based on a strong desire to promote shareholder value.

The Ultimate Guide to Stock Investing: Entrepreneur, independent investor, instructor and a visionary of my team here. I've been playing with stocks and sharing my knowledge to the world. The stock market is cool, and I love it! Member Login Blog Courses Resources Contact Us Start Here. Why Do Companies Buy Back Their Own Stock? The top 6 reasons why companies buy back their own shares 3 main ways a company can implement a share repurchase How stock buybacks can greatly boost a company's stock price and increase its shareholders' value How repurchases of common stock can negatively affect your investment return.

Quick Navigation What is a Stock Buyback or Stock Repurchase? Provide Stock Buyback Programs to Shareholders. Repurchases of Common Stock Can Negatively Affect Your Returns.

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