eli5: what are stock buybacks, why are they generally considered a bad thing (for most of us), and what’s the rationale for having it?
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The company is buying its own stock back in the market. It’s not necessarily “bad” it can raise the price of the stock. But some people believe that instead of buying stocks back they should invest that money into the employees and/or improvements, or R&D.
There are some other tricky things I think can happen to like tax breaks and stuff. Corporate bonds also have some slimy things businesses can do with them as well. I’m sure someone else will have a better answer than me with this
The company is buying its own stock back in the market. It’s not necessarily “bad” it can raise the price of the stock. But some people believe that instead of buying stocks back they should invest that money into the employees and/or improvements, or R&D.
There are some other tricky things I think can happen to like tax breaks and stuff. Corporate bonds also have some slimy things businesses can do with them as well. I’m sure someone else will have a better answer than me with this
A stock buyback is when a corporation buys its own shares. Typically, the buyback amounts are quite large, which has the effect of increasing the price of the stock. For a long time, buybacks were heavily restricted, as they were seen as a form of market manipulation. In 1982, the SEC under Ronald Reagan relaxed the rules on buybacks, and in1997 they surpassed dividends as the primary means of paying out investors.
They are viewed as manipulative by some people because the share price doesn’t increase due to some change in the fundamentals of the business, but simply because a large number of shares have been bought off the market. Also, there’s evidence that only large investors and/or senior executives and board members really benefit from the buybacks.
As for a rationale for buybacks, one is that they are more advantageous, tax-wise, for investors than an actual dividend payout. Also, if the corporation is unable to regularly increase, or even maintain, their dividend payout, they can get penalized by the market.
Let’s say Company A has one Million shareholders and $1M leftover at the end of the year after paying all of their expenses.
Traditionally they would pay a dividend, and just give that $1M evenly to all the shareholders.
….but *dividends* come with *taxes* and shareholders do not like taxes.
So a solution! Instead of paying that money in dividends, companies can go ahead and just buy shares of the company. This lowers the number of shares out there in the market so everyone else’s shares are worth more (bigger piece of the pie), so the stock price goes up. As long as the shareholder doesn’t sell his stock he now doesn’t pay any taxes this way until he sells.
Let’s say Company A has one Million shareholders and $1M leftover at the end of the year after paying all of their expenses.
Traditionally they would pay a dividend, and just give that $1M evenly to all the shareholders.
….but *dividends* come with *taxes* and shareholders do not like taxes.
So a solution! Instead of paying that money in dividends, companies can go ahead and just buy shares of the company. This lowers the number of shares out there in the market so everyone else’s shares are worth more (bigger piece of the pie), so the stock price goes up. As long as the shareholder doesn’t sell his stock he now doesn’t pay any taxes this way until he sells.
A stock buyback is when a corporation buys its own shares. Typically, the buyback amounts are quite large, which has the effect of increasing the price of the stock. For a long time, buybacks were heavily restricted, as they were seen as a form of market manipulation. In 1982, the SEC under Ronald Reagan relaxed the rules on buybacks, and in1997 they surpassed dividends as the primary means of paying out investors.
They are viewed as manipulative by some people because the share price doesn’t increase due to some change in the fundamentals of the business, but simply because a large number of shares have been bought off the market. Also, there’s evidence that only large investors and/or senior executives and board members really benefit from the buybacks.
As for a rationale for buybacks, one is that they are more advantageous, tax-wise, for investors than an actual dividend payout. Also, if the corporation is unable to regularly increase, or even maintain, their dividend payout, they can get penalized by the market.
When a company makes a lot of profit there are different hings that can be done with the money.
They could simply give the money to the owners, that is the ones who own shares of the company, in the form of dividends.
They could also reinvest some of the money into the company, buying new equipment or expanding into new markets. They could raise the wages of the employees to boost morale and employee retention rates. They could also safely invest the money in such a way that they have it available in case they need it later.
Or they can buy back some of their own shares from the shareholders. They go to people who own part of the company and give them money for the part that they own.
This is a way to give the shareholders money, similar to paying out dividends, but in some places it saves the stockholders a lot more money tax wise (and cost everyone else).
What makes a lot fo people angry is this legal tax-cheating, but also the fact that companies make record profits but don’t actually put any of that money to the parts of the company that made those profits like the workers etc.
What really makes people angry when a company takes the profit it makes in one year gives that money out to shareholders in a way that avoids paying taxes and then next year or a few years later they ask for a government bailout for the very taxpayers they cheated on earlier.
People will wonder why the company didn’t put some money to the side for bad times or why they didn’t invest it in making the company more profitable and why the taxpayer should foot the bill for this greed and shortsightedness rather than the people who benefited from it.
If you are shareholder they can be great though.
When a company makes a lot of profit there are different hings that can be done with the money.
They could simply give the money to the owners, that is the ones who own shares of the company, in the form of dividends.
They could also reinvest some of the money into the company, buying new equipment or expanding into new markets. They could raise the wages of the employees to boost morale and employee retention rates. They could also safely invest the money in such a way that they have it available in case they need it later.
Or they can buy back some of their own shares from the shareholders. They go to people who own part of the company and give them money for the part that they own.
This is a way to give the shareholders money, similar to paying out dividends, but in some places it saves the stockholders a lot more money tax wise (and cost everyone else).
What makes a lot fo people angry is this legal tax-cheating, but also the fact that companies make record profits but don’t actually put any of that money to the parts of the company that made those profits like the workers etc.
What really makes people angry when a company takes the profit it makes in one year gives that money out to shareholders in a way that avoids paying taxes and then next year or a few years later they ask for a government bailout for the very taxpayers they cheated on earlier.
People will wonder why the company didn’t put some money to the side for bad times or why they didn’t invest it in making the company more profitable and why the taxpayer should foot the bill for this greed and shortsightedness rather than the people who benefited from it.
If you are shareholder they can be great though.
Imagine you own a bunch of shares in a company and you also run it.
Imagine you could just sell your shares to the company you own, to transfer this money into your pocket. But this gets taxed!
Instead, you could get your company to buy other people’s shares, raising the value of yours, and take out a loan secured on them to release this value if you need it. No tax paid by you.
Sure, there are decent reasons for stock buybacks, but there are many dodgy ones.
Imagine you own a bunch of shares in a company and you also run it.
Imagine you could just sell your shares to the company you own, to transfer this money into your pocket. But this gets taxed!
Instead, you could get your company to buy other people’s shares, raising the value of yours, and take out a loan secured on them to release this value if you need it. No tax paid by you.
Sure, there are decent reasons for stock buybacks, but there are many dodgy ones.
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