What does it mean when a company repurchases stock

Stock repurchases occur when a company buys back its own shares on the open market. The company's management makes the decision on when and how many shares to repurchase. Though share repurchases may look similar in the mechanics, the motivations for each board of directors can be vastly different, depending on the company's circumstances.

Management may initial a stock repurchase if it feels its stock is undervalued by the market. At least in theory, management can then resell the shares when the market better appreciates the value of the company and make a profit for the company. When a company has excess cash reserves, management may choose to buy back shares rather investing in new factories, research and development, or paying a dividend.

In addition, repurchasing shares increases the number of shares the company can issue to new investors or pay to employees in the form of stock options. For example, if a company's articles of incorporation limit the number of shares outstanding to 1 million shares and the business has already issued that many, it can't offer any more stock options to key employees without repurchasing shares.

Management might also use a stock buyback as a defense against another company taking over. Sometimes, a rival will attempt to take over the company by buying up enough stock to take a controlling interest. If management wants to prevent the takeover, it can attempt to buy back enough of the outstanding stock to make that more difficult.

In theory, the first shareholders to tender their shares when the company makes a buyback offer are the most willing to sell, so by removing those shares from the market, the rival has a harder time buying the remaining shares.

Managers might also engage in stock buybacks to improve the company's financial ratios, particularly its earnings per share and diluted EPS.

For the regular EPS, the fewer shares outstanding, the higher the EPS. When a company repurchases its shares, the EPS increases for the remaining shares.

A Breakdown Of Stock Buybacks

The diluted EPS includes and stock options or convertible securities outstanding when figuring the number of shares outstanding, so if the company has started issuing large stock options to employees, its diluted EPS what does it mean when a company repurchases stock may drop. To arbitrage forex software trading this, management can repurchase already outstanding shares.

Why would a company buyback its own shares? | Investopedia

Mark Kennan is a writer based in how to make a lot of money trading stocks Kansas City area, specializing in personal finance and business topics.

He has been writing since and has been published by "Quicken," "TurboTax," and "The Motley Fool. Skip to main content.

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Undervalued Stock Management may initial a stock repurchase if it feels its stock is undervalued by the market. Excess Cash Reserves When a company has excess cash reserves, management may choose to buy back shares rather investing in new factories, research and development, or paying a dividend. Preventing Takeovers Management might also use a stock buyback as a defense against another company taking over. Improving Financial Ratios Managers might also engage in stock buybacks to improve the company's financial ratios, particularly its earnings per share and diluted EPS.

References 4 Motley Fool: Are Stock Buybacks a Waste of Money? Big Reason for Stock Boom: Companies Buying Back Stocks University of Chicago: What Drives Companies to Repurchase Their Stock? Share Buybacks as Takeover Defense. About the Author Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics.

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