Share buyback
A Share buyback occurs when a company repurchases some of its own stock either through purchasing shares on the open market or by buying shares directly from shareholders through a tender offer at a premium to current market price.
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Expanded Definition
Share buybacks (or simply "buybacks") are typically considered a positive development by investors. A buyback can indicate that the company believes itself to be undervalued. However, if the company happens to be incorrect about its own prospects, then the company has actually done a disservice to its investors.
The share buyback may increase the share price of a company by reducing the supply of shares available for purchase. The investor can benefit from this in two ways: (1) The stock price of said company may go up; (2) The investor's percentage share of the company's earnings is now perceived to be greater by other investors using common investor metrics such as P/E ratios.
Some investors prefer buybacks to dividends, as the shareholder does not have topay a dividend tax. Proponents of share buybacks contend that they represent a more efficient means of returning earnings to shareholders than dividends.
A company may also buy its shares back to help fend off hostile takeover bids. By reducing the number of shares available and driving up the share price, the company using a buyback strategy makes it more difficult for an investor to gain a controlling stake in the company.
The reverse situation of the share buyback is called dilution.
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