Stock-market / Stock Market / Buyback of Shares, call, put etc.
Buyback of shares refers to the process wherein a company repurchases its own outstanding shares from existing shareholders. This is typically done at a price that is higher than the current market price. The bought-back shares are either retired or kept in the company's treasury, reducing the total number of shares in the open market.
Reasons for Buyback:
- Boosting Share Price:
- By reducing the number of outstanding shares, a buyback can increase the earnings per share (EPS) and, consequently, the valuation metrics, potentially boosting the share price.
- Optimism about the Future:
- A company's decision to buy back its shares is often seen as a positive sign by investors. It signals that the management believes the stock is undervalued and has confidence in the company's future prospects.
- Utilizing Excess Cash:
- Companies with surplus cash may choose to use it for buybacks when they don't see attractive investment opportunities. This allows them to return value to shareholders.
Process:
- Cancellation of Shares:
- Shares bought back are typically canceled or kept in the company's treasury. This leads to a reduction in the total equity and an increase in the ownership percentage for remaining shareholders.
- Source of Funds:
- Companies can use their reserves to fund the buyback. However, they are generally not allowed to borrow for the purpose of share buybacks.
- Government Encouragement:
- In some cases, governments may encourage cash-surplus public sector undertakings (PSUs) to undertake share buybacks as a part of their disinvestment strategy.
