MENU
EDU Articles

Learn about investing, trading, retirement, banking, personal finance and more.

Ad is loading...
Help CenterFree ProductsPremium Products
IntroductionMarket AbbreviationsStock Market StatisticsThinking about Your Financial FutureSearch for AdvisorsFinancial CalculatorsFinancial MediaFederal Agencies and Programs
Investment PortfoliosModern Portfolio TheoriesInvestment StrategyPractical Portfolio Management InfoDiversificationRatingsActivities AbroadTrading Markets
Investment Terminology and InstrumentsBasicsInvestment TerminologyTradingBondsMutual FundsExchange Traded Funds (ETF)StocksAnnuities
Technical Analysis and TradingAnalysis BasicsTechnical IndicatorsTrading ModelsPatternsTrading OptionsTrading ForexTrading CommoditiesSpeculative Investments
Cryptocurrencies and BlockchainBlockchainBitcoinEthereumLitecoinRippleTaxes and Regulation
RetirementSocial Security BenefitsLong-Term Care InsuranceGeneral Retirement InfoHealth InsuranceMedicare and MedicaidLife InsuranceWills and Trusts
Retirement Accounts401(k) and 403(b) PlansIndividual Retirement Accounts (IRA)SEP and SIMPLE IRAsKeogh PlansMoney Purchase/Profit Sharing PlansSelf-Employed 401(k)s and 457sPension Plan RulesCash-Balance PlansThrift Savings Plans and 529 Plans and ESA
Personal FinancePersonal BankingPersonal DebtHome RelatedTax FormsSmall BusinessIncomeInvestmentsIRS Rules and PublicationsPersonal LifeMortgage
Corporate BasicsBasicsCorporate StructureCorporate FundamentalsCorporate DebtRisksEconomicsCorporate AccountingDividendsEarnings

What is a Buyback?

When a company decides to use excess cash to purchase its own shares from the market, it is called a buyback or “share repurchase program.”

There are only so many things a company can do with earnings in excess of their projections; among these are issuing a dividend, paying off debts, expanding, acquiring another company, or buying back shares of its own stock. Buybacks are also known as Stock Repurchase Agreements. There may be guidelines in state law or the company’s contracts or buy laws that determine what options they have and how many shares can be repurchased.

There are a few ways buybacks can be accomplished. Among these are purchases in the open market where the company advertises a buyback and shareholders can take advantage of the offer, even if it is at the prevailing market price, and this is the most commonly used method.

Other options include tender offers, privately-negotiated agreements, and structural programs which include accelerated share repurchases. The decreased supply in the marketplace will cause the shares prices to rise for stockholders, who now own a proportionally greater share of the company and will experience a higher earnings per share (EPS). Sometimes buybacks are a more tax-efficient way to distribute capital than dividends. It also signals to the market that the company believes the shares are undervalued, which improves investor sentiment around the company.

Sometimes buybacks are done to counteract the dilutive effects of employee stock option redemptions or M&A (mergers and acquisitions) activity. Tender offers are a public agreement to buy a certain number of shares within a certain price range, and are subject to many reporting requirements. Insider trading laws such as Regulation M are meant to prevent repurchases from being done for the benefit of insiders. If share repurchases cause the number of shareholders to shrink below 300, the company may “go private” and will no longer be listed on an exchange.

Accelerated repurchases are done with the help of an investment bank, who shorts the amount of stocks the company would like to retire, and the company is able to retire a set number of shares almost immediately.

Ad is loading...