Why do companies buy back their own shares?
In: Economics
Shares represent a *share* of the company’s profits. If you own a share, you are entitled to receive a portion of the profits as *dividends*. Not all companies pay out dividends, because the money can instead be reinvested into the company. Think of, like, a delivery company that spends that money on more trucks so that next year profits *should* be higher. Famously, Amazon has been doing this for its entire existence.
Regardless, that’s what shares are – an agreement that you will get some of their profits if and when they have profits. Companies sell stocks to get cash immediately in order to run the business. Thinking back to our delivery company: when it was starting out, maybe they needed some quick cash to buy the first several trucks they needed in order to function. Although buying and trading and selling stocks can be complex, the concept is pretty straightforward – They get money now in exchange for the promise of paying you a percent of their profits later.
The company only gets money when they sell the stock the first time. Every other time the stock is bought and sold, the company gets nothing. It’s like a used book – the author only gets money the first time, they can’t track who is buying and selling and trading the book after that. However, the share still entitles whoever owns it a chunk of the profits. The company isn’t getting any money out of it, but they’re still paying money to it.
A stock buy-back returns the stock to the company’s ownership so that they don’t have to pay anyone that share of the profits anymore. That’s more money for the person or people who own the company, which includes everyone else who still owns their shares. They don’t buy more shares, but since the profits go up, they get more. Since there are fewer shares (and the profits they represent are higher), those shares are worth more so shareholders can sell them for more if they choose. It also means that the company can later sell those shares again if they need cash.
In this way, it’s the reverse of the initial sale: they’re *paying* money now in return for keeping money later.
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