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.

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.

Conclusion

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.

What Is Paper Trading, and Why You Should Try It

Everything you should know about paper trading

If you’re a novice investor who’s afraid of trying their luck in the real world of stock trading, don’t lose hope. You can practice your trading strategy and get a taste of what actual trades look like through paper trading. It is the best way to gain experience in trading without the risk of losing your hard-earned money. Investing in stocks is not for the faint-hearted, but with paper trading, you can experience real trades without risking real money.

Also known as virtual trading, most brokerage firms offer this to brokers who want to practice buying and selling trades without any risk of losing their money. It is the perfect option for new traders that can practice place trades and fine-tune their investment strategy before they commit to trading in the real stock market. If that sounds appealing to you, we have the low-down on paper trading and why you should try it right here.

What Is Paper Trading?

When you want to practice trading without compromising your funds, try your hand at simulated investing with fake funds. That allows you to test the investment strategy you want to use when making trades without using real money. Most investors prefer using paper trading as it allows them to understand market complexities. As the trading occurs in a fictional setting, traders don’t have to worry about losing money, but they will also not make money from their trades.

What Is a Dummy Stock Market?

A simulator for the stock market or a virtual stock market is known as the dummy stock market. It is a trading platform where traders and investors can try their hand at paper trading. Most dummy stock markets are generally websites and smartphone apps that brokerage firms run. The stock market simulators generally function like the real stock market so that people can get the hang of making actual trades, and find out how their investment strategy would have played out on the actual stock market.

Live Trading vs. Paper Trading

The best part about paper trading is that it allows you to fine-tune your investment and trading strategy without putting up real funds. You can trade without the stress and pressure of losing money. However, during paper trading, you also get a false sense of security since you know there won’t be any consequences if your trades fail in the market.

On the other hand, live trading is a different beast altogether because when you place your money on the line, you feel the most pressure. You can’t replicate the emotion and nerves of live trading when you use paper trading. However, if you are an investor interested in taking their trades to the next level, you should consider paper trading.

How to Diversify Your Investment Portfolio?

The best method for diversification of your investments

One of the most important pieces of advice that any investor should heed is that they shouldn’t solely rely on one investment source. Investors should be savvy and know different ways to invest their money to have a diverse portfolio. That ensures you won’t suffer massive losses if things don’t work out your way or the stock market takes a turn for the worse. It is wise to diversify your investments and think about putting money into different assets and stocks.

Every successful investment strategy relies on diversification, as it affords you growth for your investments and protection against losses. However, you must be smart about diversifying your investment portfolio because nothing is guaranteed if you don’t make suitable investments. That is why we have prepared this short guide on how to diversify your investment portfolio.

What Does Diversification Mean?

When you purchase various asset types, you multiply your means of income, known as diversification, as you are not relying on a single investment. The assets you choose will be part of your investment portfolio. You can diversify your portfolio in several ways, but the main thing you should remember when diversifying your investments is that you must have appropriate protection against losses. You don’t want to be in the position where if one investment fails, it affects your entire investment strategy.

The smart choice would be to make different investments in assets that are in separate markets. That way, you will gain protection in the event of an investment failing. For instance, you could lose all your money if you have only invested in stocks during an economic crunch as the stocks will fall in value. Diversification of your investments means that you won’t suffer catastrophic losses if one area of your investment fails.

How to Diversify Your Investments?

Your diversified investment plan will be different than other investors since it will be based on factors such as income, retirement goals, gender, and age. To diversify your portfolio correctly, you will need to understand what assets present the most value for your portfolio. If you’re thinking in terms of the stock market, you have several choices, which are as follows:

  • You can invest in stocks, which will give you partial ownership of a business
  • You can invest in bonds, which will allow you to profit from a government or business
  • You can invest in commodities such as gold or what to make money when their value rises

To ensure that you do diversification properly, you can also diversify your investment in an asset class. For instance, if you invest in stocks, you can invest in multiple types, such as individual stock or a mutual fund. So, if you purchase stock in Apple, you should also buy a mutual fund. That way, you will have two types of stock investments. Even if Apple goes bankrupt, you may lose money from that stock, but you will still have your investment in the mutual fund.  

The Typical Investment Risk of Different Assets

What are the investment risks of different assets

Each investment carries a different risk, determined with a thorough and proper risk assessment. However, it would help most investors make better investment decisions if they knew about the risks that each asset carried with it. Therefore, we will share the investment risk of different assets to paint the right picture. Here is the typical investment risk of various assets.

1. Cash Equivalents and Cash

You should consider cash equivalents and cash to be the safest and best way to keep your money. Bank CDs, savings accounts, and money market accounts come with FDIC insurance and offer modest interest rates. Cash equivalents that carry the least amount of risk are U.S. Treasury Bills and money market funds. So, if you were looking for safe investments, they don’t come much safer than these investments.

2. Fixed Income Assets and Bonds

Investing in bonds is considered to be less risky than investing in fixed-income assets. Corporate and government bonds are fixed-income assets. You should know that when investing in bonds, there are different risk levels for each bond type. It would be best to look at the ratings from agencies such as Standard & Poor’s and Moody’s to find bonds you can ideally invest in.

3. Mutual Funds and ETFs

If you’re searching for diverse investments, they don’t come much better than mutual funds and ETFs. When you invest in these funds, you can purchase different bonds, stocks, and other assets through a single investment. However, these funds’ assets are riskier, which is why you should do your homework to find funds that are less risky to invest in.

4. Individual Stocks

The most common investments around today are stocks, and each stock carries risk. When you purchase stock in a company, you get a share of the ownership, and the price of the stock will go up and down depending on the company’s performance. The stock’s market performance will also reflect in its value. Some investors consider purchasing individual stocks risky because they are volatile, and their value fluctuates wildly.

5. Penny Stocks

Penny stocks are riskier than other investment types because their value fluctuates wildly depending on market conditions. Most investors consider penny stock investments a gamble instead of an investment because you can never be sure whether you will earn a profit or loss from this investment.

Conclusion

We have discussed some of the major assets that carry different investment risks. If you want to benefit from your investments, you must understand the risks that each asset class carries within itself to make wise investment decisions that help your financial future.