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. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. How do corporate actions affect floating stock?

    Learn what floating stock is, and find out about some of the actions a company may take to affect the amount of the company's ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  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

    How MasterCard Pulled Off a Buyback

    Stock buyback refers to publicly traded companies buying back their shares from shareholders. Why would they do that?
  5. 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.
  6. 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?
  7. 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...
  8. Investing

    Are Record Stock Buybacks Too Much Of A Good Thing?

    By any measure, $104 billion is a lot of money. That's the dollar value of share buyback announcements made in February -- the largest monthly figure since these flows were first tracked 20 years ...
  9. Investing

    Are Declining Buybacks a Bad Sign for the Equity Market? (C, MS)

    Learn why U.S. companies overall have curtailed their stock buyback programs in 2016. Discover the effects these reduced buybacks may have on markets.
  10. Investing

    The Dirty-Little Secret Behind Corporate America's 'Buyback Frenzy'

    Corporate America's "wealth giveaway" continues. Ever since America's largest corporations hunkered down and began hoarding unprecedented amounts of cash to protect themselves in the aftermath ...
RELATED TERMS
  1. Buyback Ratio

    The ratio of the amount of cash paid by a company for buying ...
  2. Buyback

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

    A reduction in the number of a publicly traded company’s shares ...
  4. Treasury Stock (Treasury Shares)

    The portion of shares that a company keeps in their own treasury. ...
  5. Call Auction

    Where participants buy or sell units of a good. At a call auction, ...
  6. Dutch Auction

    1. A public offering auction structure in which the price of ...
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

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

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

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