What happens when a company buys back its shares?

By Investopedia Staff AAA
A:

When a company performs a share buyback, there are a few things that the company can do with the securities they buy back. The company can reissue the stock on the market at a later time. In the case of a stock reissue, the stock is not canceled, but is sold again under the same stock number as it was previously sold. The company may give or sell the stock to its employees as some type of employee compensation or stock sale. Finally, the company can retire the securities.

In order to retire stock, the company must first buy back the shares and then cancel them. shares can not be reissued on the market, and are considered to have no financial value. They are null and void of ownership in the company. Retired stock is repurchased from the money saved in the company's retained earnings. After the stock is repurchased, the issuer or transfer agent acting on behalf of the share issuer must follow a number of Securities and Exchange Commission rules regarding stock. The stated goals of the SEC's rules for the handling of canceled stock are to reduce and eliminate fraud resulting from the use of canceled securities, reduce the need for physical movement of securities, and to improve the processing and transferring, as well as those processes involved in securities transactions. There have been occasions in which canceled securities have gone missing and appeared on the international market as current and valid securities.

Retired stock is canceled according to the following rules. Securities that have been retired, or canceled, must be clearly marked with the word "canceled". Canceled securities must be kept in a dedicated, secure storage area. Transfer agents must keep a retrievable database of all canceled or destroyed stock. Finally, transfer agents must write and follow a set of procedures on how to deal with canceled or otherwise terminated stock. It is worth noting that the SEC does not mean to interfere with scripophily, but has to institute regulations in order to prevent fraud and theft of destroyed or canceled securities.

For more information, see Old Stock Certificates: Lost Treasure or Wallpaper.

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