ELI5, what is the buyback of shares?
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One ways companies try to create more shareholder value is by buying shares that trade on the stock market and retire them, thereby increasing the fraction of ownership of each share remaining in hands of investors.
Say a company has profits of $1m and 1m shares outstanding, then earnings per share is $1, and if the company trades at a PE ratio of 20, then the stock would trade around $20/sh.
If the company buys back 200k shares, and 800k remain traded by investors, then the same $1m in profits is now $1.25/sh so a 20 PE would translate to a share price of about $25/sh.
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