When a company has spare cash, it has a few choices. It can invest in its business, pay down debt, hand money to shareholders as dividends, or buy back its own shares. Buybacks have become one of the biggest ways companies return money to investors, particularly in the US, and they play a bigger role in share prices than many beginners realise.
What a buyback is
A share buyback, also called a share repurchase, is when a company buys its own shares from the market. Those shares are then usually cancelled or held by the company, which reduces the number of shares available to investors.
Companies typically announce a buyback programme with a maximum amount they intend to spend over a period of time. They are not always obliged to spend the full amount, and they can slow down or pause if conditions change.
Why companies do it
There are several reasons a company might choose a buyback over other uses of its cash.
Returning money to shareholders. Buybacks are an alternative to dividends. Rather than sending cash directly to investors, the company uses it to reduce the share count, which leaves each remaining shareholder with a slightly bigger slice of the business.
Boosting earnings per share. With fewer shares in issue, the same profit is divided among fewer shares, so earnings per share rise. That can make a company’s figures look stronger even if total profit has not changed.
Signalling confidence. Management may present a buyback as a sign that it believes the shares are undervalued. Whether that is true is another matter, but the announcement can lift sentiment.
Flexibility. Dividends are often seen as a commitment, and cutting them can upset investors. Buybacks can be adjusted more quietly from year to year.
How buybacks can support share prices
A company buying its own shares adds a steady source of demand to the market. For large companies with big programmes, that demand can be significant and can help cushion share prices during weaker periods.
That matters for indices too. The largest US companies, which carry the most weight in indices such as the Nasdaq 100, include some of the biggest buyers of their own shares. Our guide to the Nasdaq 100 explains how those companies dominate the index.
The criticisms
Buybacks are not universally popular. Critics argue that money spent repurchasing shares could have been invested in research, equipment or staff, which might do more for long-term growth.
There are also concerns about timing. Companies sometimes buy back shares heavily when prices are high and stop when prices fall, which is the opposite of what a careful investor would want. And because buybacks lift earnings per share, they can flatter results that are linked to executive pay.
Some companies borrow to fund buybacks. When interest rates are low, that can look cheap. When borrowing costs rise, as they have with US 10-year Treasury yields reaching their highest level since 2002, the sums can look less attractive.
Blackout periods
Companies usually limit buybacks in the weeks before they report results, a period often called a blackout. With the US third-quarter earnings season about to begin, some of that corporate demand may be reduced for a time. Traders sometimes note this as one factor among many, though its effect on prices is debated and should not be overstated.
What it means for traders
For a beginner, the main takeaway is that buybacks are part of the supply and demand picture for shares. A large programme can support a share price, and a cut can remove that support. But a buyback does not guarantee a rising share price, and it does not make a weak business strong.
Keep buyback news in proportion, treat it as context, and keep your own risk rules in charge. Our explainer on what stock indices are is a helpful starting point if you are new to trading shares and indices.
If you would like to build a stronger foundation in how markets really work, our free trader assessment is a quick way to see where your knowledge stands and what to focus on next.
