Did you hear what we heard? Yes, Tata Consultancy Services Ltd. announced that it is considering a buyback proposal in the meeting that will be held today.
But what is actually meant by buyback? And why is it essential for the company and its shareholders? Yes, if you are a novice in the stock market, you must probably be thinking about these questions!
Buyback occurs when a company buys outstanding shares of its own stock either with excess cash or borrowed funds. This reduces the total number of shares available to investors, thus increasing the value of the shares that remain as there is less supply.
Didn’t Understand? Don’t worry! In today’s blog, we will discuss Buyback and how they work?
Understanding a Buyback
Buyback, also known as the share repurchase, occurs when a firm purchases its own outstanding shares to bring down the number of available shares in the market.
Firms buy back their own shares for many reasons, such as raising the value of remaining available shares by reducing the supply or blocking other shareholders from taking over the control.
With stock repurchase, firms are also permitted to invest in themselves. As the number of outstanding shares is reduced in the market, the proportion of shares that are owned by the management also increases. A firm might also feel that its shares are undervalued and can perform stock repurchase to provide investors with a return.
The share repurchase reduces the number of existing shares, making each share worth a greater percentage of the reduction or the stock price elevates.
Stock repurchase may also indicate to investors that the company has enough cash to be kept aside for emergencies, and there are only fewer chances of economic troubles.
How do Buybacks Work?
Stock repurchase plans are decided and announced by executives and authorized by the company’s management. But just announcing a planned share repurchase does not always mean that it will happen. In some cases, the target price of the stock that the company sets may not be met, or a tender offer may not be accepted.
Reasons Why Companies Buyback Stocks:
Below are the main reasons why companies’ buyback their stocks:
Alternatives to Buyback
Stock repurchases are one of the ways for a company to use its capital for increasing shareholder value. Other alternatives are:
- Dividends i.e., returning cash on hand to investors
- Reinvesting the excess capital in research and development
- Using capital for acquiring securities or other companies
As share repurchase programs have come under scrutiny in the past few years, it is also important for us to understand the other alternatives as an important part of understanding share repurchase.
Read more about Corporate Actions from ELM School
Buybacks Vs. Dividends
Below are the main differences between share repurchase and dividends:
One should note that both share repurchase and dividend options are a great way of rewarding the shareholders. For investors looking for regular income, the dividends option would be good. Whereas for those looking for long-term gains, share repurchase options will be beneficial.
What Buybacks means for Individual Retailers?
So, a share repurchase is good or bad? Well, this is not a simple question. Many factors need to be considered, as the share price at the time of purchase, whether better investment options exist, and whether an investor prefers dividends more than share repurchase
We hope you understand what share repurchase means and why companies do a stock buyback. Also, we hope you found this blog informative and use it to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us in our mission of spreading financial literacy.
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