eli5 what are buybacks and how do they raise company profit?
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Company X has 100 stock shares, that currently cost about $100 each, this means that the entire company is worth $10,000.
During the last year company X has made a profit of $1,000, and intends to pay $500 back to the shareholders, they now have 2 options:
Option 1: Simply give each shareholder $5, which will result in every shareholder having a share worth $95 and $5 cash.
Option 2: Buy 5 of its own shares, meaning there’s now only a total of 95 shares, each worth ~$105.
In both scenarios, the total value is still $10,000, it’s just distributed in different ways.
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