A:

An odd-lot buyback occurs when a company offers to purchase shares of its stock back from people who hold less than 100 shares.

A popular method that companies use to buy back stocks is called a Dutch auction. Shareholders who are interested in participating in the auction indicate a price range within which they would be willing to sell their stocks back. The company will buy back the shares from the lowest tendered offers, all at the same price. The price is the highest of the accepted offers.

This type of offer makes it less expensive both for the company (due to the reduced cost of servicing these small shareholder accounts) and for the shareholders (because they do not have to pay brokerage fees to sell their shares). A buyback also can increase a stock's price-to-earnings ratio by decreasing the number of outstanding shares.

Some investors consider buybacks when evaluating a particular stock's potential. In the Kiplinger.com article "Winners Among Companies That Buy Back Stock" (March 2005), David Fried states that an odd lot buyback is "an enormous vote of confidence by those who know it best - the company's senior executives," and that "companies buy back stock when they are really undervalued or when there's something positive that's going to happen."

To go through the mechanics of a share buyback and what it means for investors, read our related article A Breakdown of Stock Buybacks.

This question was answered by Katie Adams.

RELATED FAQS

  1. What is the average price-to-book ratio for companies in the drugs sector?

    Find out more about the price-to-book ratio and what the average P/B ratio is for companies in the drug manufacturers - major ...
  2. How does a company decide when it is going to split its stock?

    Learn why some companies decide to split their shares, and understand how they think it helps the stock's liquidity and future ...
  3. Why are some spin-offs taxable and some are tax-free?

    Learn how spinoffs of subsidiaries from a parent company are typically done, and what determines whether a spinoff is taxable ...
  4. Which has performed better historically, the stock market or real estate?

    Find out why stocks have historically performed better than real estate in U.S. history, why this makes sense, and why the ...
RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...
  3. Institutional Ownership

    The amount of a company’s available stock owned by mutual or ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  5. Registered Holder

    Shareholders who hold their shares directly with a company.
  6. Acquisition

    A corporate action in which a company buys most, if not all, ...

You May Also Like

Related Articles
  1. Stock Analysis

    Google Stock: A Tale of Two Share Classes

  2. Stock Analysis

    Intel Doesn't Need New Management

  3. Stock Analysis

    Will Spinoffs Give American Capital ...

  4. Stock Analysis

    Will American Airlines Fall Back To ...

  5. Stock Analysis

    Qualcomm's New Buyback Program Is Well-Timed

Trading Center