Consumer technology giant Apple Inc. Share buybacks are very common in Australia too. Local pharmaceutical company CSL Limited ASX: The number of buybacks have risen substantially since the GFC and some investors may be confused and wonder what the purpose of a buyback is, why companies buy their own stock, what the impact on the share price is and how shareholders benefit from a buyback.

As the name suggest, a share-buyback or a share repurchase refers to the process when a company re-acquires its own stock or, in other words, the company buys shares back from its shareholders. While investors clearly benefit from dividends, as money is deposited directly into the shareholders bank account, the benefits of buybacks are indirect.

However, buybacks are often considered an attractive way to invest surplus cash whilst boosting investor confidence. While buybacks might be a sensible way for companies to use extra cash, however, in some cases, a buyback might not be in the best interest of shareholders. Listed below are a few scenarios when a share repurchase might hurt shareholders. However, as briefly outlined above, not every buyback automatically benefits shareholders.

Hence it is important for investors to gauge the timing and purpose of a buyback and also look at the overall financial situation of the company. Since the onset of the GFC, a greater emphasis has been placed on central banks around the world to stimulate a recovering global economy. In this piece, we will attempt to explain the unconventional economic phenomenon that is quantitative easing.

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Education An investment in knowledge pays the most interest. Home Education What is the Purpose of a Share Buyback and How can Shareholders Benefit from it? What is the Purpose of a Share Buyback and How can Shareholders Benefit from it? As the name suggest, a share-buyback or a share repurchase refers to the process when a company re-acquires its own stock or, in other words, the company buys share back from its shareholders. Contact the Author You can contact the author on the following: Take Advantage of Undervalued Share Price: The buyback has two effects on the company's stock: The market thinks that management would only buy their own stock if they believe that the value per share will increase in the medium to long-term.

Reduce Dilution and Increase Ownership: Over time companies tend to issue new shares, e. Reducing the number of shares outstanding can have a positive impact on various ratios that are tracked closely by the market. Return on Asset ROA: Return on Equity ROE: Earnings Per Share EPS: Hence reducing the overall outstanding shares boosts the EPS of a company. Buying back stock 'for the sake of it' may have an adverse impact.

You may also like: What is Quantitative Easing and How is it Applied? What is it and How is it Relevant to Investors? How to Open a Share Trading Account 18 May, Why is the RBA Cutting Interest Rates? Purchasing Managers Index PMI 29 Apr, Gain instant access to expert market insights Access Free View Features.

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Stock Buybacks - The Benefits and Pitfalls

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The Investor Benefits of Share Buyback Programs

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