Eli5: why do stock buy-backs benefit corporations?
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A stock buyback is when a company uses cash to buy its own shares from the open market.
Shares are sold to build capital to help grow and maintain a company, buy buying them back the company is in a sense returning that money to shareholders.
Companies don’t like keep large amounts of cash on hand because that’s money that isn’t helping the company. So a stock buyback is one way to funnel that cash into the pockets of the shareholders.
Having less shares on the market also helps keep the share price stable, and can increase the share’s value. Less shares also can mean that dividend payments get better.
Having less stocks also means you consolidate more power into the remaining share holders. Since owning stock gives you a say in the management of the company, having less stocks in the market means that the major stock holders have more power.
So why are stock buybacks controversial?
Several large corporations have taken bailouts from governments during bad economic times in order to keep the company afloat. They then used some of that money to perform stock buy backs rather than keeping the company afloat. So public money has been used to directly enrich shareholders instead of helping out employees.
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