When the stock market is sluggish or it is passing through a bear run, many companies announce stock buybacks. Although this practice is pretty common, the layman investor does not give a second thought to these announcements during trade. There is a lot of potential involved and you should definitely not miss this opportunity.
What is the meaning of stock buyback?
When a company buys its own stock in the stock market it is considered as a stock buyback and the shares that are taken are re-titled as treasury stocks and it becomes an asset to the company..
What is the benefit of a stock buyback?
- First and foremost there is an increase in the shareholder value i.e. the EPS ( Earnings per share) increases and the outstanding share decreases. Hence the company will stand to profit.
- If the EPS increases, it will show a result that the stock is undervalued and this will alert the investors. Investors will invest on these shares and the price of the stock moves upwards.
- There is an increased float because the number of outstanding shares decreases and the shares that are available signify a larger percent of the float. If at this time, demand increases the stock will show an upward price rise as supply is low.
- Corporations generally buy back their stock if they have excess cash in their kitty. This implies that the company is financially stable and your investments will be safe.
- When companies buy back shares aggressively during a slowdown it means that the company is confident on itself and the company thinks that the price is relatively cheap. The company is actually taking advantage of the discount on the shares. The company usually buys back shares, when the stock has taken a major hit and the price is low.
- Buyback stocks do not necessarily mean that you go and buy every buyback stock that you can lay your hands on to. Do not fall a prey to the stock market. Be careful as you are investing your hard earned money and you do not want to be deceived. It is observed that not all buybacks are the same and some companies do manipulate buybacks to try and attempt to wrongly influence the stock price.
Do thorough researches before you opt for a buyback stocks. Do not get carried away. The stock market is definitely not for the hungry investor. It is a place for the calculative investor. There are many online stock market sites that will help you out. Talk to an expert in the investment sector.