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

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.