A share buyback or repurchase implies that a publicly traded company is purchasing its own shares which it once issued from the investors. Usually, the company buys shares with the upper price than the price the share currently trades on any specific date. In this
What is Share or Equity
Friends, before we get into this, let’s discuss what the share or equity is and how it works. Stock or equity is an ownership right that a company gives to whom the company issues preferential shares. It may seem awkward that you become the owner of that specific company by purchasing the shares of the company. The company has many equity shareholders. All these shareholders or owners then become eligible for any profit made by the company according to their investments. As they are the equity holders, they have the voting right in any issues related to the company either it is for receiving debt from the market or the business expansion.
- Read also: Why would a company buy back its own shares? | Investopedia
- Read also: Good or bad? Top five reasons why companies go for share buyback
The Points to consider when a company goes for Share Buyback
When a company earns or has large ideal money then it tries to manage the huge money in the purpose of share buyback. When a company needs money then it offers equity shares or ownership rights to any individual or any other
Usually, in a share Buyback
So, as an individual investor what you will do remains important when a company offers the share buyback on any stocks in which an individual has invested. You need to consider the following points while any company offers share buyback.
Watch out the Fundamental, Qualitative aspects of the company
If you find the fundamental aspects such as Debt ratio, compounded sales growth, compounded profit growth, return on equity, dividend payout, etc. and Qualitative aspects such as business model, competitive advantage, management of the company are quite good then do not get trapped into the buyback policy of the company. If the profit and loss account, balance sheet are quite impressive and the company has delivered robust performance year-on-year basis don’t make the mistake to sell the stock in the sake of 20% return.
Effect on Dividend Yield
Many retail investors get confused between the relation of Share buyback and dividend yield.
Make use of Ideal Money
When the company has
To conclude share buyback policy is useful for retail investors also in the sense that share buyback enables a win-win situation for the company and retail investors both. Since the companies have to pay a dividend distribution tax @15%, and an investor has to pay taxes on dividend, it is a better choice for a company to buy back its own shares than to pay dividends which attract taxes for both.
Apart from this, there is another reason for share buyback. Share buyback enables a company to reduce its outstanding share. So, the earning per share will increase accordingly. The remaining shareholders obviously gain more earning per share. When a company’s management is quite efficient enough and able to deliver
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