Stock buyback

Definition

A stock buyback is when a company purchases its own shares from the open market. This reduces the number of outstanding shares and can increase the value of remaining shares.

5 Must Know Facts For Your Next Test

1. Stock buybacks can signal that a company believes its stock is undervalued.
2. Buybacks can improve financial ratios such as earnings per share (EPS).
3. They may be funded through existing cash reserves or by taking on debt.
4. A reduction in outstanding shares often leads to increased ownership percentage for existing shareholders.
5. Stock buybacks can attract regulatory scrutiny regarding their impact on market fairness and capital allocation.

Review Questions

• How do stock buybacks affect earnings per share (EPS)?
• What are two potential sources of funds for stock buybacks?
• Why might a company choose to execute a stock buyback?

Related terms

Dividend:

A portion of a company's earnings distributed to shareholders, usually in the form of cash or additional shares.

Earnings Per Share (EPS):

A financial ratio calculated by dividing net income by the number of outstanding shares, indicating profitability.

Outstanding Shares: The total number of a company's shares that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by company insiders.