Buyback of shares refers to a company’s move to repurchase its own shares from the market. In other words it the opposite of initial public offering where company issues shares to the public. Given below are some of the reasons due to which company go for buyback of shares –
1. Many companies do buyback of shares to increase the EPS of the company’s shares, as after buyback the number of outstanding shares will decrease it will lead to increase in the earning per share of the company.
2. When company has excess cash reserves but not many new profitable projects to invest in, companies tend to go for buyback of shares.
3. Many times promoter wants to increase the stake in the company and buy back of shares is an ideal way of doing that, in some cases it is done in order to reduce the dilution in promoter holding, when the chances of takeover of the company are increasing.
4. Buyback of shares is mostly done at a higher price than the current market price of the stock in the stock market. Many times by buying their shares at a price higher than prevailing market price, company signals to the market that its share valuation should be higher.