Buyback of shares is when the company repurchases its own shares either directly from the open market or through a tender. But what are the reasons for buyback of shares? Let’s have a quick look at some of them.
Reasons for Buyback of Shares
- The first reason for a company to repurchase its own shares is to consolidate its ownership by reducing the number of shares in the market. This makes the management and reaching a unanimous decision easier because now a lesser number of people are involved in the decision-making.
- If the company is making profits but there are no new or exciting projects to invest in, it is a great decision to buy back its own shares. So, another reason for the buyback of shares is to manage the extra cash efficiently.
- A company also repurchases its shares when it thinks that it is undervalued. The confidence vested by the company in itself sends out a positive signal to the investors. This further causes the share prices to attain a better value.
- It is also a very tax-effective way of rewarding the shareholders. When a company gets consistent profits, then the investors expect some rewards. While the majority of the companies issue dividends, it is taxed thrice. This is the reason why it is a better option to buy back the shares at a higher price and give the rewards to the shareholders.
- The reduction in the number of shares in the market also increases the earnings per share for the existing shareholders. So, companies often opt for buybacks when they want to improve the overall fundamental health of the company.
Hope now you know what are the reasons for the buyback of shares. If you have any other queries related to the stock market, you can reach out to us and we will try to answer them as soon as possible.
