Share Repurchases and the Associated Risks – In recent years, share repurchases (stock buybacks) have skyrocketed as companies prioritize spending their funds on stock buyback programs instead of investing for the future. These share repurchases have become a hot topic, and many lawmakers and politicians are advising against the negative impact of these stock buyback programs. The last decade has seen some of the biggest corporations in the world involve in share repurchases.
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These include the likes of Apple, which leads the way with over $10 billion spent in stock buybacks. Companies are spending their revenue on share buybacks to drive up their stock price, but they are also doing so by borrowing money from financial institutions. This has caused great concern among lawmakers who believe that adopting such as approach might be counter-intuitive in the long run.
It places tremendous pressure on corporations to ensure that they maximize their share repurchases. If they are unable to repay the loans they have taken to buy back their stock, it could result in an economic depression, the likes of which haven’t been seen since 2007. While it may seem like a drastic statement, there is some truth involved because companies interested in only share repurchases are missing the bigger picture.
Instead of investing in their resources and training their employees, they spend money on their stocks to inflate their value. That is a short-term goal for companies and will not help them in the longer run. This approach will come back to haunt them in the end, because most companies aren’t equipped to deal with the challenges they will face in the market.
If an organization wants to ensure that its prospects will not be compromised, it must start investing money in the company. The argument by critics today is that companies are using their money to inflate their share prices and reward insiders and investors. They should be worried about investing in new products or hiring new employees instead.
The current market is strange because as the world comes to grips with the pandemic, the stock market is down, and every company’s share prices are suffering as a result. That has forced several corporations to dip into their coffers and invest in stock buyback programs. The strategy is not sustainable, and even though it presents results in the short-term, there is also the risk that it would lead to the kind of financial crisis that the world witnessed in 2008.
There have been calls in the marketplace to develop new laws and regulations that stop companies from repurchasing their shares. What action lawmakers take to put a hold on share repurchases and reduce the risks involved in stock buybacks remains to be seen.
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Stock Buybacks / Share Repurchases by Public Corporations (ie. Apple, Tesla, Netflix, Facebook, Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)
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