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
To raise money a company sells shares or percentages of ownership in the company (there’s different types of shares but let’s keep it simple for now).
If the company makes a lot of money and has money to spare, one way to spend that money is to buy back some of the outstanding shares. In theory this can be useful if a company wants more autonomy and wants to reduce the influence of investors, but in reality that almost never happens. Because as you buy up those stocks and remove them from the market there are fewer shares to buy, which makes people value them more and causes the price of the stock to rise.
It’s an easy way to raise the value of your company which is beneficial for those that own stocks and appealing for new employees that might be offered stock options. But in reality it’s kind of market manipluation, it keeps investors happy while actually not making anything.
Latest Answers