A stock buyback (share repurchase) is a company’s purchase of its own stock on the market. It is contrary way to pay out capital for shareholders to dividends. Stock buybacks are getting more and more popular because of more friendly capital taxation (depending on the country).
Many believe that if company implements stock buyback program, it is a sign that management board sees company’s shares to be undervalued on the exchange. But it is not necessary so. If a company has free cash and doesn’t have valuable opportunities to invest in activity/assets, then it has to choose the best way to pay out the cash for its investors. The most practical ways are dividends and stock buybacks. According to tax system and other circumstances the company may chose one of the way or both of them for capital payments.
During stock buybacks all investors doesn’t get cash directly, but stock buybacks works in several ways:
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