The Reason Companies Buy Back Shares
It’s not so easy to follow the stock market. The changing stock prices of companies are affected by different things.
One of the reasons is the buyback of shares. That said, owning shares becomes a bit complicated this way. Also, it’s a fact these days that the buyback of shares has become common. Just recently, Alphabet, which is the parent company of Google, has announced its plan to buy back its shares of about 25 billion dollars in stock.
This may be insignificant to the average person and would think that it’s just another business dealing. Still, you’ll want to know how the buyback of shares can affect the company’s stock prices.
First off, you’ll want to know more about the buyback of shares.
The stock buyback is also known as the share repurchase program or the company repurchase. Needless to say, this happens when companies do a buyback of shares.
Most healthy companies do that most of the time. The buyback of shares means that they have a lot of cash assets. That said, there are a lot of things that companies can do when it comes to having a lot of cash. Having a lot of cash means that the company can purchase a new property or invest in product development. Having a lot of cash also means that the company won’t have trouble paying any debt it has.
One thing that you should know about companies who do buyback of shares is that they’ve already invested in all the necessary things. Oftentimes, a company buys back its own stock out of optimism. They do so thinking that they have undervalued stocks at the moment.
The disadvantage of having a lot of cash
Success may be a good thing, but some companies fall victim to it. For investors, it’s important for a company to have higher earnings every quarter of the year. The estimates are important in this matter and missing one could be devastating for the stocks.
That said, repurchasing stocks is a way to pay off the investors instead of paying dividends. Most companies consider that as a better alternative.
A company goes public to make sure that they’ll be able to raise enough money. This means that they exchange money for a piece of ownership in the company. Of course, the reality is that companies like Google can have hundreds or thousands of owners as shareholders.
That said, the company has to consider the opinion of their shareholders when it comes to company decisions. As shareholders, they have the legal right to vote for the company’s direction of growth. However, those votes can be conflicting most of the time. This means that they have to lessen the current owners of stocks by buying them back.
After some time, many companies will have trouble making room for growth. Finding a way to grow becomes their main objective once again.