Penny Stock | Understanding Stock Buybacks The Basics

In the most simple terms, a Stock Buyback is when a company chooses to buy back its own shares of stocks from the public. A stock buyback distributes cash to existing shareholders in exchange for a fraction of the firms outstanding equity. When a company repurchases its own shares, it reduces the number of shares held by the public.

Why would a company do such a thing? Lets take a look!

If a company is healthy, then there would be two primary reasons to do a stock buyback. The first reason is to pay overdue dividends to current investors or to simply reward these investors that stuck with the company. The second reason for a buyback is that if the company chooses to buy back a portion of its shares, stockholders will still benefit even if they dont sell by the reduction in outstanding shares.

Another reason for a company to repurchase its stocks is if a companys stock is suffering from low financial ratios. Buying back a portion of its stock can give the companys financial ratios a temporary boost. For example, key ratios like earnings per share (EPS) and price earnings ratio (PE) look better because they are based on the number of outstanding shares.

Some companies buy back shares as protection against unfriendly takeovers from other companies. By gathering outstanding shares off the open market, the company makes it more difficult for a raider to take control. While you might think this is a little hostile, there are always bigger businesses trying to find smaller companies to eat up before they become any threat.

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