Contributed by Olga Vanucci.
A share buyback is a decision by a company to buy back its own shares from the marketplace, reducing the number of shares outstanding.
With fewer shares outstanding and no change in the total value of the company, each share is worth more. The price of the stock goes up.
For example, a company is worth $10 million and has 100,000 outstanding shares: It’s stock price is $100. If it repurchases 10,000 of those shares, reducing its total outstanding shares to 90,000, its stock price increases to $111 — without any actual increase in the company’s value.
A company does a share buyback when it has cash but chooses not to pursue a productive way to invest that cash into its business to actually increase the overall value of the company.
Between January 1 and February 1 of 2018, companies listed in the Standard & Poor’s 500-stock index announced buyback programs totaling $173 billion, which was the most significant amount of buybacks ever counted so early in a year. That is all money that was NOT invested back into the businesses.