A buyback, also known as a share, repurchase, is when a company buys back its own shares from the open market or directly from shareholders. This reduces the number of shares available in circulation (called the "float"), and can have several effects:

Why Companies Do Buybacks:

1. Increase Share Value:
   
   

• Fewer shares mean each remaining share represents a larger ownership slice.
  
  

• This can increase the earnings per share (EPS), which may boost the stock price.
  
  

2. Signal Confidence:
   
   

• Management may believe the stock is undervalued and wants to signal confidence in the company’s future.
  
  

3. Return Capital to Shareholders:
   
   

• Instead of (or in addition to) paying dividends, a buyback is a way to give money back to investors.
  
  

4. Offset Dilution:
   
   

• Companies issue shares for stock options or acquisitions. Buybacks can offset the dilution caused by this.
  
  

Types of Buybacks:

• Open Market Repurchase: The company buys shares on the stock exchange over time.
  
  

• Tender Offer: The company offers to buy shares at a specific price directly from shareholders.
  
  

• Direct Negotiation: The company may negotiate with large shareholders to buy back shares.
  
  

Pros and Cons:

✅ Pros:

• Can boost stock price and EPS.
  
  

• Flexible (unlike dividends, which set expectations).
  
  

• Can improve return on equity.
  
  

❌ Cons:

• May signal a lack of better investment opportunities.
  
  

• Could be used to manipulate financial metrics.
  
  

• Might reduce company cash reserves or increase debt if financed by borrowing.