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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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.
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