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What Are The Impacts Of Buyback On Share Price

18 Sep 2023

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 | What is a Spot Rate | Secured Vs Unsecured Bonds

 

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