A:

Each share of stock sold in the market represents partial ownership in the issuing company. If an individual or entity buys enough of these shares, they can take what's called a controlling interest in the company. For example, if you own 1/10th of a percent of XYZ and thousands of other investors own their own small portions, none of you, on your own, can affect sweeping change within the company. But an individual who owns 51 percent would be considered to have a controlling interest and can, on his or her own, determine the way the company is run. A management buyout occurs when managers or other executives in a company purchase that controlling interest from other shareholders either to take control of the company or, in some cases, to take the company private.

In a stock buyback, the company itself repurchases issued shares of its own stock in order to reduce the number of outstanding shares. By reducing the number of outstanding shares, the company can create an increase in the market price of the stock. It can also protect itself from a hostile takeover, which occurs when an outside individual or entity buys a controlling interest against the company's wishes. Finally a stock buyback can increase the earnings per share as it's reducing the number of outstanding shares by which the net income is divided. Plans for gradual stock buybacks over a period of time are referred to as share repurchase plans. Occasionally, a stock buyback could occur because the company plans on going private meaning that it will no longer allow for public ownership of its shares.

RELATED FAQS
  1. Where can I find current data on stock buyback offers?

    Learn how to find information about stock buyback offers, understand the different methods of buybacks and why some criticize ... Read Answer >>
  2. Why would a company buyback its own shares?

    Learn about share buybacks and some of the many reasons a company may choose to repurchase its own stock, including ownership ... Read Answer >>
  3. How does it affect a company's credit rating to buy back shares?

    Learn how buying back shares can negatively affect a company's credit rating if the company uses debt to finance a share ... Read Answer >>
  4. Why are stock buybacks so controversial?

    Understand the nature of stock buybacks and why many investors and analysts consider them to be controversial despite their ... Read Answer >>
  5. In what situations does it benefit a company to buy back outstanding shares?

    Learn about the reasons a company may choose to buy back its outstanding shares, such as reducing the cost of capital and ... Read Answer >>
  6. What does a buyback signify about a given company's financial health?

    Learn about stock buybacks and what they can mean about a company's financial health depending on the motivation behind their ... Read Answer >>
Related Articles
  1. Investing

    6 Bad Stock Buyback Scenarios

    Buying back shares can be a sensible way for companies to use extra cash. But in many cases, it's just a ploy to boost earnings.
  2. Financial Advisor

    Weighing the Pros of Stock Buybacks vs. the Cons

    In recent years, the value of stock buybacks has come into question. Here we break down the trend and weigh the pros and cons of share repurchasing.
  3. Managing Wealth

    4 Reasons Why Investors Like Buybacks

    From a financial perspective, buybacks benefit investors by improving shareholder value, increasing share prices, and creating tax beneficial opportunities
  4. Investing

    Stock Buyback/Repurchase

    A stock buyback, or repurchase, occurs when a company buys its own shares off the market and therefore reduces the amount of stock outstanding.
  5. Investing

    Why Buybacks Can Be a Waste of Cash (BX, BAC)

    Learn the motivations behind share repurchase programs, including how they can mask slowing organic growth and why many companies buy their shares high and sell low.
  6. Investing

    Are Share Buybacks Propping Up the Market? (AAPL, MSFT)

    Companies are repurchasing their own shares at a rate not seen in nearly a decade, prompting observers to fret that demand for equities is not as strong as the past six weeks' rally would suggest.
  7. Small Business

    Are Stock Buybacks Always Good for Shareholders?

    Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves.
  8. Investing

    How Buybacks Warp The Price-To-Book Ratio

    Relying on price-to-book can get ugly if a company has repurchased stock. Learn why.
  9. Investing

    How MasterCard Pulled Off a Buyback

    Stock buyback refers to publicly traded companies buying back their shares from shareholders. Why would they do that?
  10. Investing

    2 Companies Doing Share Buybacks The Right Way

    <p>When financial historians look back at the current bull market, they'll likely call it the "era of the stock buybacks." As I've written s...
RELATED TERMS
  1. Buyback

    The repurchase of outstanding shares (repurchase) by a company ...
  2. Leveraged Buyback

    A repurchase of significant amount of shares through the use ...
  3. Expanded Share Buyback

    An increase in a company’s existing share repurchase plan. An ...
  4. Buyback Ratio

    The ratio of the amount of cash paid by a company for buying ...
  5. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  6. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  6. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
Trading Center