You must have many times that a company has bought back its own shares. Now, as a first time investor, a thought may creep up in your mind as why would a company indulge in this activity and is it really beneficial for the people? So, without any further ado, let us know more about the process of share buyback and its effect on the shareholders.
What do you understand by the share buyback?
When a company buys back its own shares issued in the market earlier is known as the share buyback. It means that whatever the shares left in the stock market, the company will begin the process of purchasing them. By this way, a company will be able to gain the full ownership that previously was with the people. After the buyback, there will be either fewer or no shares left in the market for the investors.
Why a company engages in the process of buying back the shares?
This is one of the most prominent questions that may crop up into the mind of the investors, especially the beginners. If the company is consistently generating profits, then why can't it use the money to buy a new company or manufacture and launch a new product? Why purchase its own shares?
Here are some of the prominent reasons for the company engaging in the share buyback process:
Undervalued share: Keeping the current scenario of the stock market, if a company feels that their share price is low or undervalued, then it may take the decision to buyback the shares.
Get maximum ownership: By buying back the shares, the company can retain the full ownership, which was previously with the stockholders.
Brings a change in financial aspects: After the completion of the share buyback, the financial ratio of the company changes significantly. It leads to the increase in the Earnings Per Share (EPS) and Price to Earnings (PE) ratio.
Is Share Buyback Good Thing for the Investors?
Now, when a company has purchased the shares back, then how it will be beneficial for the investors? This is a question that most of the first time investors fail to answer. The share price of the company skyrocket when the share buyback decision is announced. If there is a less share in the market left after the buyback, then the dividend for the shareholders will be on the higher side.
In the end, it is important to note that there are more things to do or know in the market apart from the buying back of the shares. If you are alien to the stock market, then you may experience a lot of difficulty in trading. In such a situation, they need a quick guidance. There may be a lot more questions coming up in their mind. In such a situation, they must take help of the professional stock market advisors who possess the necessary knowledge about the market and most important help the people to invest in the market without any apprehensions.