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What Are The Impacts Of Buyback On Share Price

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Published Date: 18 Sep 2023Updated Date: 03 Feb 20256 mins readBy MOFSL
Impacts Of Buyback On Share Price

Introduction

  • Buyback or repurchase of shares is a practice that several companies follow in the stock market to purchase their stock from the market. 
  • Repurchase can happen either from the open market or by issuing a tender offer by the company. 
  • Buyback has several impacts on the share price of the company’s stock, such as a temporary sharp rise in its price. Let’s explore various other impacts of buyback on a share price. 

What is the impact of buyback on share price?

  • Buyback causes a company's share price to soar as the number of shares in the market reduces and supply-demand dynamics come into play. 
  • It is often believed that buyback happens when a company believes its stock to be undervalued and it is a good time to buy it. So the demand for stock rises, leading to a price rise. 
  • Buybacks create a support level for the stock price, which could be a good indicator while forecasting share price movement. 
  • The Earnings Per Share (EPS) ratio of the stock increases due to a reduction in the number of outstanding shares of a company after the buyback. 

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What are the other impacts of buyback on a company?

Some key impacts of a buyback on the company are: 

  • Improved financial statement 

Buyback positively impacts the company's cash flow statement and statement of retained earnings, which helps build a good image of the company in the market. A good financial statement indicates a healthy company and attracts new investors. 

  • Increased ROA and ROE ratios

There will be a decline in the amount of shareholder’s equity in the company. This will directly impact the key metrics of the company’s performance, such as Return on Asset and Return on Equity

  • Gives a positive outlook on the company

Repurchasing of stocks can be perceived as a display of confidence by the company in themselves. This projects a positive image of the company and builds trust in investors, which, in turn, positively impacts their share price in the market. 

What are the benefits for investors in a buyback?

  • Shareholders of the company gain profit from the price rise triggered by the buyback. 
  • The value of shares with investors increases as shares become scarce in the market. 

Bottom line

  • Buybacks usually result in a spike in share price, but often it can lead to some unfavourable news about a stock that may result in the decline of the share price. 
  • Companies buy their shares in repurchasing using their excess cash reserves, which can significantly impact the company’s liquidity. 
  • Buybacks can also be used with negative intentions to boost the share price of a stock, so one needs to be cautious. 

 

Related Articles: What Is Statistical Arbitrage and How Does It Work | Difference Between FII And DII 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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