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What is a Stock Repurchasing Program? Why Would a Company Repurchase Its Own Stock?

A stock repurchasing program, or buyback, occurs when a company purchases its own shares from the public market, thus decreasing the total number of shares outstanding in the market.

How Do Companies Issue Shares in the First Place?

To understand stock repurchases, you first need to know how companies issue shares in the first place. When an investor purchases stock from a company, they’re actually buying from shareholders who already own shares of that company. Those shareholders then take their money and buy something else (their trade), leaving behind some cash for their investment in that company. The money stays in circulation and continues to fuel trade elsewhere.

How Does a Firm Decide Whether to Purchase Their Own Shares?

To decide whether to repurchase its own shares, a firm must assess whether current share prices are likely to appreciate. If they are not, then stock repurchases offer little value. To help make such an assessment, analysts typically look at two metrics—the price-to-earnings ratio and price-to-book ratio—and calculate how stocks stack up against other investments in their market. For example, if we were determining whether Exxon Mobil Corp.

Who Issues Offers to the Public?

Companies issue stock to raise money. Most companies that are publicly traded offer their stock in an initial public offering (IPO). The company raises capital by selling a percentage of itself to investors. A small portion of newly issued stocks goes directly to existing shareholders, such as employees and early investors. In some cases, however, companies will go back to capital markets and purchase their own stocks using funds raised from new offerings or retained earnings.

Benefits of Share Repurchases

There are several reasons why companies will choose to repurchase their own stock. For one, share repurchases can be used as a tool to influence shareholders’ feelings about management and/or specific strategies. Companies may also want to repurchase shares if they feel like they are undervalued or if they simply wish to decrease the number of outstanding shares, thus increasing earnings per share.

Are There Restrictions on Share Repurchases?

While share repurchases are not illegal, there are some restrictions in terms of what you can do with your stocks. You cannot conduct a buyback if it would leave you with fewer than 300,000 shares. As well, repurchases are subject to Section 16 regulations issued by the Securities and Exchange Commission (SEC), and they also need to be disclosed in a company’s quarterly and annual SEC filings.

The Bottom Line

A stock repurchase program is when a company spends money to buy back its own stocks from investors. When these shares are purchased, they’re removed from circulation, meaning there are fewer shares available and each one will have more value.

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Why Would a Company Repurchase Its Own Stock?

Whether you’re an investor or not, you’ve probably heard the term stock buyback at least once or twice. You may even know that some companies are being rewarded for repurchasing their stock, but you may not know exactly why this occurs in the first place. Stock buybacks are generally used to generate growth and gain from rising stock prices as well as to decrease the share count of outstanding shares to make the company more attractive to future investors and buyers.

Why Companies Buy Back Their Stock

There are several reasons why companies may choose to repurchase their own stock, but most of them fall into three broad categories: buybacks to offset dilution, strategic buybacks, and activist buybacks. The first reason –offsetting dilution – means that as more shares are issued (commonly in employee stock purchase plans) management buys back enough shares to keep its overall ownership percentage constant. This can be very helpful if a company sees share prices rising significantly and wants shareholders’ equity per share to remain stable.

What Does This Mean For Investors?

It’s important to understand why a company would want to repurchase its own stock, particularly when its stock price is higher than it was 12 months ago. A potential danger of stocks with high buyback ratios is that they can lose out on potential growth opportunities by repurchasing so much of their own stock. You should be careful before investing in stocks with these characteristics, as you don’t want your money tied up in a company buying back its own shares rather than acquiring new businesses and growing revenues.

How Can I Identify Possible Trades?

Most of my trades are based on underlying, fundamental analysis. But there are other ways to find trade candidates. When a company announces that it is repurchasing its own stock, that’s usually a sign of confidence and strength; therefore, it can be an excellent opportunity to take advantage of.

Examples Of Stocks That Have Bought Back Shares

In recent years, more and more companies have been using cash to repurchase their own shares on the open market. Some of these buybacks even occur at prices higher than what they were originally issued for. A lot of people view share repurchases as an easy way for companies to manipulate earnings per share (EPS) figures, but it’s not always that simple.

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When companies purchase their own shares, it is usually regarded as a positive sign for investors. However, it is crucial to consider why that company might want to make such an investment. It may be because of strategic motives or with an eye on improving certain ratios or metrics. The reasons behind stock repurchases also vary depending on what industry you are looking at and where in that industry you are focusing your research.

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