Buyback of shares is the process of a company repurchasing its own shares from the open market. While the public is getting familiar with this concept, what are the advantages and disadvantages of buyback of shares?
Let us have a look.
Advantages of Buyback of Shares
- It is used to rectify the value of a company if it is thought of as undervalued. With a buyback, the shareholders who want to exit at the current market price can sell their shares. If the company is actually undervalued, then the existing shareholders will see a good profit in the future.
- A company can pay tax-efficient compensation to its shareholders through a buyback. It is because the company repurchases its own shares at a higher price than the market value. This allows the shareholders to sell their shares to make good profits.
- Buyback of shares also increases the price of the shares. It is because buybacks reduce the number of shares in the market, increasing demand and decreasing supply. All these factors further result in an increase in the prices of the shares.
- It also gives the shareholders a chance to exit the shares.
- Buybacks also help protect the company’s prices in an unfavorable situation. It kind of creates support, even when the whole market is going against it.
- A decrease in the number of shares also causes an increase in every stakeholders’ share. This increases the EPS and some other financial ratios of the company.
Disadvantages of Buyback of Shares
- A sudden increase in the EPS can often create an illusion of perfection. This can often mislead people and cause losses instead of profits.
- The buybacks of a company can often create an image of the great rise in prices and give the company the right to control the share price. The sudden strike of reality in the future can cause losses.
- If the company is investing again in the same business, it can often lead to missed opportunities.
- Not the very wise use of money.
There are a lot of reasons for the buyback of shares and so are the advantages and disadvantages of buyback of shares. If you have any more stock market queries, you can fill in your details and we will try to resolve them as soon as possible.
