Why does this reduce capital, and why does this reduce the company’s ability to pay creditors?
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Most of the comments here are written by business major freshmen. Here’s the simplest answer without going into preferential shares and other technicalities.
Nothing changes. The company spent money to buy an equivalent amount of % of itself.
I am the founder. I decide to sell 500 of my 1000 shares at 10$ per share.
The company is worth 10,000$ but only 50% is available for purchase. I get 5,000$ cash and still “own” 50% of it.
Investors expect a return so unless they’re dumping stock, I can only buy my own shares back at the asking price at any time. Normally this doesn’t make sense as I’m just buying back at a higher price what I myself sold.
Let’s say my company doubled in value, it’s now worth 20,000$. Half of it still belongs to other investors. If I want to buy the shares from them at “current” price so i have to pay 10,000$. If I do so, I now own 100% of my company and have 10,000$ cash left. We’re back to where we started, it’s a net zero transaction. The only benefit is now I own 100% and can resell it if I choose to do so.
There are cases where this is beneficial but generally stock buy back is a financial instrument tied to ownership, dividend split and some other stuff.
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