eli5 what are buybacks and how do they raise company profit?

Question

eli5 what are buybacks and how do they raise company profit?

In: 8

Answer 1

First of all they do NOT raise company profit. A share buyback, is simply when a company uses leftover money to buy back shares of their own company from investors. The shareholders who remain now have a greater share of the company and the shares are worth more (in theory).

This is preferable to taking that same money and paying dividends to shareholders instead, since dividends are taxable and unrealized gains from share buybacks are not.