Skip to main content

Buy back stocks: Meaning, advantages & disadvantages.

By



Meaning of buy back stocks

Buyback stocks is a process where companies repurchase its stocks from stockholders or open market. This is generally considered to be a good sign as it is one indirect way for companies with surplus cash to maximize the wealth of its stockholders.A company with surplus cash prefer to buy its stocks when current market price of stocks is less than book value or what they expects it to be. Companies buy their stocks at a premium price and this leads to increase in stock price.

Possible reasons for buyback are discussed below:

1) To increase stockholders value as company uses its surplus funds which is not suitable for any investment options it results in higher earning per share.

2)For protection against corporate takeovers. Buyback helps in increasing the promoters holding thereby reducing the chances of takeover.

3)To improve financial ratios as buyback reduces the cash component on companies balance sheet.


Advantages of buyback :

1)Companies which have profitability less then there average industry witness more price growth after repurchase of stocks than those who are having profitability more than their average industry.

2) Buyback of stocks promotes a positive message among its stockholders and they gain more confidence in company's performance as they believes if management is buying back their stock then they are sure for their good future performance.

3)Surplus cash which is not being used for some productive use is used for buying back stocks. It helps in making effective use of excess cash as idle capital will not help in bringing any income.

4) Stockholders who sells their stocks in repurchase programme have an opportunity to get current market price + premium as companies buyback their stocks at a premium amount.

Disadvantages of buyback :

1) Excess cash is used for buying back, it includes opportunity cost as well which signifies that company is neglecting opportunities like setting up new plant, increasing human resource, improving sells and more for it.

2) A company may have wrong intention of increasing their stock price and further selling them at high price. Therefore traders should check about company's history and learn if they have done something like this in past and what were their intentions to do so.

3)Stockholders may think that company is unable to perform well and is not finding any new business opportunity therefore it is using there excess cash for this purpose.

Pehla trade is among leading discount brokers. Traders can open their demat account with us for free of cost in just 15 minutes. Join us to trade across any segment by paying flat Rs1/executed order for initial one month.We aim to facilitates traders focus more on their trades and less on brokerage.
Labels:

Comments

Post a Comment

Popular posts from this blog

What is MIS, NRML and CNC order types in stock market ?

By
MIS (Margin Intraday Square Off) MIS order types are for intraday traders and need to squared off during the same trading day. It will be activated till that particular trading day only.The biggest advantage of this order type is that while buying shares using it traders need not to pay the entire amount only a margin amount is required to be paid.Because of this feature traders can buy more number of shares with less capital. If in case position is not squared off or converted into other order types by the traders end then it will be automatically squared off by RMS few minutes before the market closes. If you want to strictly trade on intraday basis then you can rely on usage of such order type. As here you need to worry about squaring off your position, it will automatically get squared off before market closes. NRML (Normal Order) NRML order type is used while trading in future market. It is used to carry forward trade orders in derivatives segment. This order type w...
Post a Comment
Read more

What are the advantages and disadvantages of pair trading ?

By
Pair trading is a market neutral trading strategy which enables traders to make a profit under different market conditions.Without learning about the recent market trend a trader matches a long position with a short position in a pair of highly correlated shares, commodities, currencies or etfs. Usually, the pairing is done in shares of companies which belongs to the same industry. Demat account and trading account are required to trade using this strategy like in others. Advantages of pair trading are discussed below: No risk from market direction Direction risk means risk associated with movements in price because of change in market direction. For an example, a short position is exposed to the risk that stock prices may rise.In pair trading, no such risk exists. Because here profit depends on the difference in price changes of two stocks which are in the pair not in the direction in which they move. Limited risk and profit in different market conditions The co...
Post a Comment
Read more

Tips to become a successful day trader

By
Indian share market has attracted various investors towards itself by its good performance and has become an attractive source of investment now. Returns earned on investment in shares by long term traders is higher than investment in other markets and assets. However high capital is required to trade on a long-term basis. Another way by which traders can trade with less capital and earn good returns is intraday trading. Day trading means not holding your position in stocks beyond the current trading day. To trade on intraday basis traders need to have  Demat account  and trading account. The risk associated with this type of trading is high. Some useful tips to become a successful day trader are discussed below: Trade by using a practical approach Movements in intraday stocks are based on the market fluctuations.To earn good profit here traders have to trade on the basis on present market movements.When the market is bullish instead of waiting for large movements...
Post a Comment
Read more