What is a Buyback in a financial market?

Buyback in a financial market

In a financial market when a company buys some of its outstanding shares to increase the value of its shares and this results in a lesser amount of shares available in the financial market thus helping its investors and the company in making a profit, this method is termed as a Buyback.

There are several reasons for a buyback, Firms Buyback their shares in the market to see a rise in the remaining share’s prices and they do that by reducing the supply of shares and preventing other players in the market from taking a controlling stake.

The buyback of shares results in inflating the price of shares available in the market and helps the company to generate revenue per share. A buyback is often done to show the investors that the company has plenty of funds to manage and operate during emergencies.

What is a Buyback in a financial market

A brief understanding of Buybacks

A buyback is done to allow a company to buy its shares and results in investment in its own company. When the number of shares available in the market decreases it in return increases the portion of shares owned by various investors.

When a company feels that the prices of its shares in the market are undervalued and to increase the value of the remaining shares, a company buys back its shares. To compensate its employees and executives, a company lets its employees buy its shares.

Let us understand a buyback with an example

Suppose ‘A’ is a company and has 100 shares available in the market and the price of each share is valued at @5 then the price of all shares would be valued at @500, now the company wants to increase the value of its shares so it buys 25 shares of its shares, spending @125, now the number of shares in the market is 75 and it’s valued at @10 per share, the price of all shares available would be @750. Now the value of the remaining shares is @750 which is because of the buyback of shares by the company.

The processes of Buybacks

A company issues a tender offer to its shareholders before the buyback and these shareholders are given options to submit or tender, all or a portion of their shares within a scheduled time concerning the current market price of the shares.

This allows investors to tender their shares rather than hold them. This results in the company’s share prices rising and gives the investors a chance to gain from their investments.

To do buyback a company generates funds from taking debts, or cash available for situations like this and also cash from the operations of the company. Buybacks done for an expanded period and in large amounts is likely to cause the price of shares to rise.

Criticism of Buybacks

Buybacks are often criticized due to reason that it gives an impression to the investors that the company does not have other means to make its business profitable and it lacks opportunities to grow. Also, buybacks can be troublesome and put a company in a precarious situation if the market takes a downturn.

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