And why do people compare using them to the Great Depression stock crash? I don’t understand and I tried.
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It’s when the company uses its own cash to buy back the stocks it had issued (and were subsequently sold).
It’s a bad thing for many reasons.
– It artificially inflates the price of the stock. Executives do this so their stock grants/options are worth more. Long term Capital gains on stock can be taxed at no more than 20%, but income can be taxed at up 37%
– it depletes the cash reserves of the company. We saw this at the beginning of COVID when a couple of airlines did some huge stock buybacks. The airlines were out of cash and couldn’t handle the sudden drop in revenue. So, of course, they went begging for a handout.
This trick was done during the Great Depression to fluff up stock prices so the corporate managers had more money but lower workers were laid off because of no cash reserve.
Stock buybacks were outlawed shortly thereafter, but under President Reagan, the SEC threw out those rules.
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