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?

Question

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?

In: 63

Answer 1

Basically a company has extra money laying around. Literally like “extra” money. What do they do with it?

– Invest in capital equipment which can grow the business and provide jobs and future capability? – NO

– Increase the salaries or the compensation of workers? – NO

– Use that money to fund some sort of public service like scholarships or donations to charity or partner with some college to build new R&D stuff or something similar? – NO

– Pay dividends out to shareholders? – NO

They literally purchase shares “back” which are held by investors. As the overall “value” of the company hasn’t changed, but now the amount of shares on the market has decreased, the price of each existing share goes up.

For the senior executives/board members whose performance and/or compensation is tied to the share price, it can be amazing.

Who decides on the stock buybacks? The senior executives/board members whose compensation is tied to the share price.