A stock buyback is a situation in which a company chooses to purchase all or part of its outstanding stock. Also known as a stock repurchase or a share buyback, this activity allows the company to control the number of shares that are made available to investors. There are two main reasons why a company would choose to buy back outstanding shares, with one having to do with dealing with a takeover attempt and the other focused on driving up the price for the remaining shares available for purchase.
When attempting to fend off attempts by a corporate raider to gain control of a business, one of the first moves is to prevent the raider from acquiring as many shares of stock as possible. To begin the strategy, the business will buy all shares currently available on the open market. The second step may be to approach current investors and offer to purchase their shares, sometimes at a figure higher than current market value. Assuming that the major stockholders are willing to stand with the company and not allow the takeover to occur, the stock buyback strategy effectively ends the raid, and allows the company to continue operating.
There are situations when a company believes its shares are not selling at an acceptable price level. In order to increase the stock price, the business chooses to purchase a portion of the outstanding shares. This application of a stock buyback strategy calls for determining how many shares can remain available to investors and generate enough interest to drive the purchase price upward. As a byproduct of this increased price per share, the earnings generated for existing investors will also increase.
The concept of a stock buyback is common in most countries around the world. It is not unusual for regulatory agencies to create and enforce limits on how this type of purchase can be conducted. In some cases, filing reports with the agency and receiving approval to proceed with the buyback is necessary. Other countries simply impose a limit on the number of outstanding shares a business can repurchase within a given period of time.
The idea behind these regulations often has to do with maintaining the stability of the markets where the shares are traded. While a stock buyback conducted by a relatively small business is not likely to cause any major issues with a market, a buyback conducted by a multinational corporation could throw the marketplace into disarray for at least a short period of time. By taking steps to protect the stability of the marketplace, regulatory agencies thus protect the best interests of all investors who actively trade in that market.
