how stock buybacks make money for shareholders
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Because the outstanding number of shares declines. If you have 100 stocks in the market worth 100 dollars each, i.e. a market share of 10000, and a company buys 10 back then each outstanding stock would be worth 111 dollars. There are more dynamics at play but that’s the basic idea behind buybacks.
Because of the company buys stocks back, there are fewer shares available for everyone else, artificially reducing supply and therefore pushing prices up for a given demand for the stocks.
It’s basically like selling fuel. Fuel is cheap, but if all the fuel selling countries get together and agree to stop selling as much fuel, the price increases because the demand remains high while the supply decreases.
A company has 100 shares and $100 in earnings, that’s $1/share in earnings. Assuming a 20 P/E ratio, each share would sell for about $20.
Now, the company buys back 20% of shares, reducing the number of shares to 80. Those same $100 in earnings are now $1.25/share. And at 20 P/E, that’s a share value of $25.
you do this when you (as a company) have money that you – somehow – cant invest in a manner that is profitable for you.
since that money is part of the evaluation that influences your stock price buying back shares in theory could leave the stock price unchanged. however usually your business does something that is better than storing money on a bank account.
so any profit you make from now on will be distributed amongst fewer shares. this means anyone keeping their share will make more money in the future. this makes the shares more attractive. this drives up the stock price.
It set a price that someone (the company) is guaranteed to buy you stock.
I.e. the shareholder wants to sell their share at $100 each, under normal circumstances, there is no guarantee that someone will buy it. But during a buyback as longer as the shareholder sell at a price at or lower than buyback price, the share will be bought by the company.
You own a company. You have 1,000,001 shares out of 2 million.
The rest you sold in the open market.
You decide after making a bunch of money you want more of the company shares
So you buy 100,000 shares.
When you buy the shares you are bidding the price out. Let’s pretend market price is $1.
So first you offer $1. Then $1.10 then $1.20
All the way up until you hit your share amount or money amount.
Essentially. Share buy backs are an announcement that a rich investor is buying so many shares.
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