How Share Buybacks Work

Understanding how share buybacks work for a company

Share buybacks, also known as share repurchases, occur when a company purchases its shares from the market to reduce the number of shares in circulation. It’s misunderstood by many investors, as they don’t know how share buybacks work and why a company would even need to initiate a buyback. They fail to understand that share buybacks can be extremely lucrative for a company when initiated for the right reasons.

They are designed to reward existing shareholders and provide them with more value for their money. When the number of shares in circulation drops, the price per share will increase, and that will mean shareholders will have more profits if they sell those shares in the market. This article will look at share buybacks, including their purpose and whether they are good news for investors.

What Are Share Buybacks?

When a company decides to repurchase its shares, it is known as a share repurchase or a share buyback. There may be several reasons why a company would opt to buy back its shares, which may include the following:

  • It feels the current shares are undervalued
  • It wants to reward existing shareholders
  • It wants to improve key metrics
  • It wants to increase share price

The number of shares in circulation decreases when a company buys back its shares, which will mean fewer shares in the market. The result is an increase in share value or price, and that will mean existing shareholders will have a chance to earn more profit if they sell those shares.

The most common reason for a share buyback is that the company feels its current shares are undervalued in the market. Therefore, it will buy back all of its shares in the market, which will create demand for the shares. When there are fewer shares in the market, it will raise the value of the shares even if it is temporary.

Are Share Repurchases Beneficial?

Share repurchases have been criticized by economists who claim that it is an artificial method for increasing share prices and an accounting trick used by CEOs to boost their earnings per share numbers. However, when done right, share repurchases can be incredibly beneficial to a company. It helps them reduce the number of shares in existence and ensures that the share price doesn’t drop below the margin the company has set.

Even though companies who engage in share buybacks are looked at with skepticism, they are only doing that to survive when you look at the bigger picture. They may be better suited to spend their money on hiring new talent or research and development, but share repurchases also provide them with a solution to their problems.

Share Repurchases and the Associated Risks

Find out about the risks associated with share repurchases

In recent years, share repurchases 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.

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.

No Scope for the Future

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.

Stock Buybacks: A Mountain or a Molehill?

Find out what is the big deal with stock buybacks and why companies prefer them

There has been a lot said and written about stock buybacks in recent times, especially after the record-breaking numbers that it put up in 2018. The people who support stock buybacks claim that it ensures the company uses its capital prudently and effectively. However, the opponents of stock buybacks claim that it is another example of short-term thinking by corporations.

Nevertheless, the figures don’t lie, and a record $807 billion was spent on stock buybacks in 2018, which was an increase of nearly 56% from the previous year. It captured the imagination of everyone, including investors, political figures, and the media. However, not everyone reported on it favorably, and even though it worked out for some investors, others lost money due to stock buyback programs.

So, the question is whether stock buybacks are a blessing or a curse for the economy? On the one hand, they help a company drive its share value and ensure that they reward its investors. However, it also means that the company has fewer funds to invest in newer products and hiring employees. How does a company achieve growth if it is spending most of its revenue on stock buybacks? There is no simple answer to that question because each company has different prerogatives and goals to achieve.

Making Sense of Stock Buybacks for Companies

The one thing that most people agree upon is that stock buybacks are not a big issue for companies who have the funds to spend on repurchasing their shares. The problem only arises when a company borrows funds from financial institutions and then uses them on stock buyback programs. The critics of stock buybacks claim that this short-term thinking by corporations will hurt the economy, as there will be less focus placed on launching new products in the market.

That will have a ripple effect on the economy, which will slowly stagnate as corporations accumulate debt to finance their stock repurchases. There is no denying that buybacks could be a major threat to the economy. Still, stock buyback supporters claim that the problem is being inflated by political figures painting an apocalyptic picture to gain support.

There is still debate surrounding the real value of stock buybacks, and whether the supporters or critics are right remains to be seen. Currently, investors and corporations are reaping the benefits of stock buybacks, and the recent trend is set to continue well into the 21st century. What the future holds for stock buybacks is anyone’s guess right now.

5 Ways to Create Shareholder Value

The different ways you can create value for shareholders

As an organization, you always look for new ways to create value for your shareholders. After all, they are the ones who have invested in company stock, and you want to generate more value for them so that they continue investing. A company that generates shareholder value is also more attractive for new investors. Therefore, you must always be on the lookout for new ways to create shareholder value for your investors.

That is easier said than done, but we will be sharing some of the best ways you can create shareholder value right here. These include the following:

1. Don’t Manage Your Earnings

Corporations that are only looking to generate profit fail to look at the bigger picture, i.e., thinking in terms of their investors’ best interests. You shouldn’t put a limit on your earning potential and not concentrate on investments that generate value. The best thing is not to prioritize short-term gains, as that won’t allow you to maximize shareholder value. Ensure that whatever decision you make regarding your company’s earnings is always in the shareholders’ best interests.

2. Hold Assets that Maximize Value

Companies can generate shareholder value by maximizing their investment in assets that produce long-term results. You should only focus on acquiring assets designed to produce results for your organization as that will improve confidence among shareholders. That will help you in the long run as more investors will think your company is an attractive investment. Not only will that help you attract investors, but it will also help you generate more value for shareholders.

3. Make Strategic Decisions Regarding Your Shares

The best way to create shareholder value is through share buybacks, decreasing the number of shares in the market. It helps to create the earnings per share, and as a result, shareholders get a bigger piece of the pie. Corporations can employ strategic share buyback programs to increase the price of their shares and help generate more value for shareholders in the process. It will maximize share value and ensure that shareholders can earn more profit from their investment.

4. Give Cash to Investors in the Form of Dividends

If you don’t think that share buybacks are the way forward for your organization, you can instead generate shareholder value by giving out cash to investors in the form of dividends. That will help your shareholders have more trust in the organization and ensure that they double their investment. When shareholders are getting rewards from their investments in the form of dividends, they would be more inclined to buy more shares.

5. Reward Your CEOs and Senior Executives

When the organization meets its objectives and raises value for all shareholders, you should reward your CEO and senior executives. Giving them appropriate compensation will increase faith from investors who will maximize their investment in the company. That is one of the best ways to generate shareholder value and confidence among investors.

Are Stock Buybacks a Good Thing or Not?

Find out whether stock buybacks are in your favor or not

When looking at the stock buyback figures, an investor can quickly recognize that the number of companies involved in this practice has increased. You don’t need to look at a business report to recognize that in 2021 the number of stock buybacks by companies has increased tenfold over the last decade. The reasons are simple, companies who have cash on hand realize that the best way to invest is to instigate a stock buyback program.

Nowadays, more companies are interested in stock buybacks than investing in the future. Organizations want to improve their earnings per share and their stock value at the same time while affording their shareholders with maximum returns on their investment. However, there are also critics of stock buybacks who complain that companies inflate their stock values to profit.

There is some truth to those allegations as organizations that want to improve their quarterly earnings, and EPS numbers are looking towards stock buybacks. The question investors must ask themselves is whether the company’s motives are genuine, and should they invest in a company that holds frequent stock buybacks? The answer is double-edged because, on the one hand, stock buybacks increase stock value and earnings per share.

However, on the other hand, they don’t represent the complete picture to investors. A company may only look towards a stock buyback program because it wants to paint a good picture artificially. The company may also be looking to prevent a hostile takeover, so it is trying to buy back its shares. Even small organizations are now jumping on board the bandwagon, and this has caused a familiar debate to resurface, are stock buybacks a good thing or not?

Look Beneath the Surface of Stock Buybacks

The primary concern that investors have with stock buybacks is that an increasing number of companies are shifting away from investing in their future and are only after short-term gains. That is a dangerous path to follow for any organization, as sooner or later, it will come back to haunt them. Therefore, investors must look beneath the surface of buybacks and make up their minds regarding whether stock buybacks hold value for them or not.

Stock buybacks help reduce the number of shares in the market, creating a demand for such shares. That is one way of artificially increasing a company’s stock price, even if the company isn’t in a financially strong position. That presents a challenge for investors since they don’t see the complete picture and, therefore, can’t make a judgment call on whether to invest in that company’s stock.

If you look at the current trend in the marketplace, you will find that almost every other company is involved in stock buybacks these days. The simple fact of the matter is that company’s want to reward their shareholders, and stock buybacks provide them with the best solution.

Pros and Cons of Dividend Stocks Investing

Everything you should know about dividend stocks investing

It is a well-established fact that dividend stock payments offer you one of the best investment options for your portfolio. However, like all investments, it has its pros and cons. You should carefully weigh them before making any investments so that you get a well-balanced portfolio at the end of the day. To make things easier for you, we will be sharing the pros and cons of dividend stocks investing. Here is what you need to know:

Pros of Dividend Stocks Investing

The best part about investing in dividend stocks is that you will get stable returns on your investment for a long time. Hence, many investors are choosing to invest in dividend stocks. Here are some of the pros of dividend stock investing:

  • You get a combination of capital appreciation and steady income from dividend stocks.
  • You can take advantage of higher bank savings from dividend stocks than you would get from U.S. Treasury securities.
  • The stock price is stabilized through dividends, and it ensures the price doesn’t drop when the market conditions aren’t favorable.
  • Companies that offer the best long-term investment options have the highest paying dividend stocks.
  • They are the best choice for retirees since it provides them with stable income and ensures capital appreciation in times of inflation.
  • There are also tax advantages with dividend income. Qualified dividends have lower tax rates, and dividends from stocks in a retirement plan are tax-deferred.

When you look at the many positives, you stand to gain from dividend payouts; it makes sense why you would want to invest in dividend stocks.

Cons of Dividend Stock Investing

Even though dividend stocks provide you with numerous benefits and are great for your investment portfolio, there are times when they can be negative as well. Therefore, we will share the cons of dividend stock investing to give you a better idea. These are as follows:

  • Compared to pure growth stocks, you may not get a lot of capital appreciation from dividend stocks.
  • The payouts from dividends are never guaranteed; if there is a cancellation or reduction of a dividend, the stock price will fall drastically.
  • Dividend stocks fluctuate wildly based on interest rates, and if interest rates increase, the stock price will fall.
  • If you come across a dividend payment that is excessively high, it could mean that the company is about to experience financial trouble.

These were some of the main negatives you could come across when investing in dividend stocks. When you look at the complete picture, the pros outnumber the negatives, which is why dividend stock investing is on the rise these days.

Predicting Stock Performance Using Insider Activity

How to predict stock prices with insider trading

Insider trading activity can be difficult to predict as you need to understand the motivations of insiders when they are trading in company stocks. That makes predicting stock performance using insider activity impossible, but there are ways you can use it to your advantage. The main concern that you must have when predicting stock performance is the number of insiders who are making trades in the market.

When insiders are confident in a stock, they will invest a major chunk of their money into the stock. That will result in more insiders buying the stock, and suddenly, the demand for the stock rises. That demand will then trigger a rise in stock price, and pretty soon, investors will be reaping the benefits of their investment. However, it doesn’t work that way for all stocks, as there are key indicators that determine whether a stock price will rise or fall in the market.

We will share the best ways you can predict stock performance using insider trading activity. You should look at all the various factors in play before investing in any stock, and these tips will help you make profitable stock investments. Here is what you should know:

1. Insiders are Buying in Bulk

If company insiders are buying stock in bulk, it is a strong indicator that they believe the stock price will go up in the future. They have access to the financials of the company and know that there will be a major announcement in the future that will see the stock price rise. Therefore, you must look at which quantity the stock is being bought by insiders. When more insiders are purchasing stock in bulk, it shows you that they are confident the stock will perform well in the coming months.

2. The Company Has Repurchased Shares

Another stock signal that investors can look at is whether the company has repurchased shares recently. That shows the company thinks its stock is undervalued, and most corporate insiders will choose a stock buyback to drive the stock price up. You can learn a lot from a stock buyback as it signals that the company wants to increase its stock price and believes that it is currently trading below value. That places you in a solid position to invest in that company’s stock and benefit from the stock price going up.

3. Top-Level Insiders Are Investing in Stock

When the top-level insiders in a company invest in the company’s stock, it is a good indicator they believe the stock price will increase in the coming months. You can look at which insiders invest in company stock and use that information to predict stock performance in the future. That will place you in a strong position when you want to invest in company stock.

What Is Risk Management in Investing?

hing you should know about risk management in investing

Millions of people invest to grow and preserve their wealth. It has become second-nature to most people, and with the right investments, you can fund your retirement, increase your assets, meet your future financial goals, and pay for your kid’s higher education. However, investing does come with risks, and you must be careful with your investments as you can lose money just as quickly as you make it.

Every investor should know about the risks of investment, and they must have a risk management strategy in place before they invest. Each investment carries risk, which means when some investments are great for others, they may not work out well for others. We will share what you should know to understand the risks of investing.

Risk Management in Investing

Every investment carries some form of risk. Some investments are less risky than others, while others may carry a higher risk level. You need to ensure you understand how much risk you are willing to take on any investment. That will determine your entire investment strategy and will be the main factor in play when you are thinking about maximizing your investments.

For instance, you decide to invest in company A because of their fantastic product. You review the company’s financial statement and determine the company’s stock price will go up in the coming months. Hence, if you buy stock in the company, there is a good chance that the stock price goes up and you make money on your investment. However, it could also happen that the stock price goes down in value due to the product’s poor performance.

The possibility that the stock price will go down is your investment’s risk assessment. Most assets don’t carry any risk at all, while some assets are riddled with risk. When you are investing, determine the level of risk of any investment so that you are prepared to handle the consequences of your investment.

Remember, you will not stand to make much money when you invest in low-risk investments. If the investment is riskier, there are greater chances of you earning a lot of money. However, keep in mind that you also stand to lose a lot of money.


It would help if you carried out a proper risk assessment of all your investments before choosing to throw your money at them. An intelligent investor always knows how much risk they are willing to handle, which is good money management. Therefore, you must manage your risk when investing and understand how risky an investment is before investing your money.

It will ensure you don’t jeopardize your financial future and make investments that will provide you with great returns in the short and long-term.

3 Ways Diversification Can Go Bad for Investors

The many downsides of diversification for investors

Even though diversification is the way to go for investors looking to achieve profits from their investments, it can all go very wrong. You must be smart with your investments when you are diversifying because your returns from the investments will depend on which asset classes you have backed heavily at the end of the day.

Young investors who are keen to diversify their investment portfolios can make mistakes, and we will highlight some of them here. That will allow you to have complete knowledge of what not to do when making investments and the different ways diversification can go wrong for investors. Here is what you need to know about diversification:

1. Investing in the Wrong Time

The first thing you must ensure when investing is that it is the right time for you. That means you must be in the right frame of mind and emotionally and financially sound to make investments. You will need to take risks, but you can make disastrous decisions when you are not thinking clearly. Even diversification can’t help you if you invest in the wrong stocks, commodities, or bonds. You need to understand the stock market and rely on investments that will offer you returns in the long term.

If you get emotional and are only looking for short-term investments, you will be disappointed. You will miss the big picture and make rash decisions with your investments, which is the opposite of what you must do. You know that you have to diversify your investments, but if it is at the wrong time, you will not get the results you want from them.

2. Avoiding Investing in Different Asset Classes

When investors are new to diversification, they want to play it safe and not have too many different investments. That could be a big mistake because you could end up with similar investments if you don’t broaden your investment net. That defeats the purpose of diversification because you want your investments to be different from one another.

When playing it safe, investors could avoid some asset classes entirely as they don’t understand them completely. Therefore, they don’t capitalize by investing in them and only invest in familiar stocks. If you don’t take risks when investing, diversification may not help you.

3. There is No Script for Investments

The biggest problem you could face with diversification is that all of your investments could fail at the same time. There no script for investments, which means you can’t predict if there is an economic crunch and the stock market, bonds, and commodities all fail at the same time. Even if you have diversified your portfolio, it will not work in your favor because everything will lose value.

That is a real possibility you must consider when making investments, and if the market conditions are taking a turn for the worse, you should hold back your investments. Even though diversification holds the key to protecting your investments, you can’t do much if everything goes down in value.

How Share Buybacks Can Affect Your Returns?

The best way to guarantee returns from share buybacks

As an investor, you are always on the lookout for stock with intrinsic value, which can propel your portfolio to the next level. That is where share buybacks are such a great asset as they allow you to figure out the company’s actual value. Most organizations engage in stock repurchases when they feel that their stock is undervalued in the market. That signals to investors that the organization’s prospects are about to change, and investing in that company’s stock will represent greater returns.

It’s not always easy to identify stock repurchases because a company could have different reasons for share buybacks. They could be looking at different ways to reward its shareholders and increase its stock price at the same time. To find value from share buybacks, you must look at the real reasons why the company decided to repurchase stock. That is easier said than done, and you must study the market conditions and the company’s history to identify if stock repurchase makes sense for them.

Finding Share Repurchase that Generates Returns

You are never guaranteed a return on your investment when you invest in stocks, which depends on market conditions and the overall performance of the stock over a period. That means investors are always gambling on the future as they can never be 100% sure that a stock will perform as well as expected. That is where share buybacks can offer you deeper insight into stock performance. It roughly translates that a company believes its stock is undervalued.

That allows investors to purchase stocks at their cheapest value and then wait for the stock price to increase in the coming weeks and months. That will mean using techniques to study the number of share buybacks that a company has implemented over time and whether they use it to increase the stock price or reward their shareholders. Finding share repurchases that generate returns isn’t always easy, and you need to have a decent understanding of the stock market to profit from it.

The easiest way to do that is to search for companies that are experiencing a downturn in fortunes. Once you notice that a company is going through a rough patch and their stock price has fallen dramatically, you will know that they are ripe for picking. The company will instigate a stock buyback program to purchase its shares on the market. That will mean fewer shares in circulation, and the company can take advantage of a higher stock price.

Get the Result You Want from Share Buybacks

You should remember that share buybacks aren’t always a good indicator that you should invest in a company’s stock. There are instances where the program can backfire, and the company will be stuck holding on to shares that continue losing value. As an investor, it is up to you to figure out which shares are worth investing in and which share buybacks will offer you greater returns on your investment. That is the secret between a successful investor and an unsuccessful investor.