When a company wants some or all of its shareholders to turn in their shares for a cash payout, it has two options: it can redeem or repurchase the shares. Redemption is when a company requires shareholders to redeem their stock for cash. For a company to redeem shares, it must have stipulated up front that those shares are redeemable, or callable. Redeemable shares have a set call price, which is the price per share that the company, when it issues the shares, agrees to pay upon redemption. A company also has the option of repurchasing shares, either on the open market or directly from shareholders. Unlike redemption, which is compulsory, selling shares back to the company in a repurchase agreement is voluntary.

A company may choose repurchase over redemption for several reasons. When the stock is trading below the call price, the company can obtain it for less per share by finding shareholders willing to sell than by redeeming and paying higher than market price. A repurchase also reduces the number of outstanding shares, which increases earnings per share (EPS) and often drives the stock price up by virtue of reducing supply. When the stock price is low, the company may adopt the "buy low, sell high" mentality of a traditional stock trader and snatch up shares to be sold for a profit at a later date.

If a company issues redeemable preferred stock with a call price of $150 per share but finds the shares trading at $120 when it wants to redeem them, it may attempt to repurchase those shares rather than paying an effective $30 per share premium on them in a redemption. If the company has trouble finding willing sellers, it can always defer to redemption as a fallback.

A repurchase reduces the number of outstanding shares, which increases a company's EPS. This looks good on a financial statement, and thanks to basic laws of supply and demand, decreasing the number of shares on the market frequently drives up the stock's price. This is not a guarantee, but it happens more often than not following a share repurchase. Sometimes the company buys back enough of its shares to regain majority shareholder status, which is obtained by owning 50% or more of the outstanding shares. A majority shareholder can dominate votes and exercise heavy influence over the direction of the company.

Finally, companies buy and sell stock just like individual investors. If a company feels that its stock is undervalued, it can attempt to buy shares at what it views as a great price. Assuming its stock price increases at a later date, the company can then issue shares at a higher price per share than it paid during the repurchase.

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  1. Direct Repurchase

    Direct repurchase is the buying of shares in a publicly-traded ...
  2. Partial Redemption

    Partial redemption is a retirement or payment of a portion of ...
  3. Accelerated Share Repurchase - ASR

    An accelerated share repurchase is a specific method by which ...
  4. Mandatorily Redeemable Shares

    Mandatorily redeemable shares are shares that are owned by an ...
  5. Callable Preferred Stock

    A callable preferred stock is a type of preferred stock in which ...
  6. Outstanding Shares

    Outstanding shares refer to a company's stock currently held ...
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