Buyback

The process of buying back existing shares that are traded on the exchanges by the company itself. It usually done so when a company has large amounts of cash and is looking to distribute it to shareholders. Since dividends are taxed and a buyback only has tax implication for those who sell the shares and record capital gains, a buyback would not affect most shareholders tax-wise. Since a buyback reduces the amount of outstanding shares, it makes each share in the company more “valuable”, and also increases Earnings Per Share(which is calculated by dividing net income by outstanding shares).

A stock buyback is a sign of confidence in the stock by the company. The period after the October 1987 crash in the stock market was marked by stock buybacks, which to some extent, propped up share prices. Though a stock buyback may also be done to negate dilution from the execution of employee stock options.

And lastly, sometimes a company buys back stock to prevent it from being taken over by another company.

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