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. 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 does executive compensation facilitate when a company buys back its stock?

    Learn about how companies use stock buybacks in order to facilitate executive compensation and why the practice is very controversial. Read Answer >>
  3. 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 >>
  4. 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 >>
  5. What companies will typically exercise buybacks, and why do they do it?

    Learn about what types of businesses typically execute stock buybacks and what this maneuver can indicated about a business' ... Read Answer >>
  6. What effect do stock buybacks have on the economy?

    Learn about the effect of stock buybacks on the economy. Stock buybacks lead to rising stock prices as the supply of stock ... Read Answer >>
Related Articles
  1. 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.
  2. Investing

    Stock Buyback Report: Was it a Smart Strategy in 2015? (AAPL, MSFT)

    Find out the story behind company stock buyback programs and how some of the larger stock buybacks of 2015 have fared for shareholders.
  3. 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.
  4. 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
  5. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  6. Markets

    How Buybacks Can Hurt Sharholders

    Buybacks can hurt shareholders in several ways.
  7. 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?
  8. Markets

    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.
  9. Markets

    Why Buybacks Might Spell Bad News for Investors

    Buybacks have helped drive stocks higher since 2009 and have accelerated in 2016. Is this still good news for investors?
  10. 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.
RELATED TERMS
  1. Buyback Ratio

    The ratio of the amount of cash paid by a company for buying ...
  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. S&P 500 Buyback Index

    An index designed to track the performance of the 100 stocks ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company ...
  6. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center