When a company wants shareholders to turn in a portion of their shares for a cash payment, it has two options: it can redeem or repurchase the shares.

Share repurchases are when a company that issued the shares repurchases the shares back from its shareholders. During a repurchase or buyback, the company pays shareholders the market value per share. With a repurchase, the company can purchase the stock on the open market or from its shareholders directly. Share buybacks are a popular method for returning cash to shareholders. 

Redemption is when a company requires shareholders to sell a portion of their shares back to the company. 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 agrees to pay the shareholder upon redemption. The call price is set the onset of the share issuance.

Redemption or Repurchase

A company may choose repurchase over redemption for several reasons. When the stock is trading below the call price of redeemable shares, the company can obtain the shares for a lower cost per share by buying them from shareholders through a stock buyback. The company might offer, as an incentive, to repurchase the shares at a higher price than the current market, but below the call price of the redeemable shares. 

A company might repurchase shares with the goal of reducing outstanding shares, which increases earnings per share or EPS. As a result, a repurchase typically drives a stock price higher by reducing the supply of outstanding shares. When the stock price is low, the company might also adopt a buy-low, sell-high strategy and earn a profit on the resale of the shares at a later date.

Sometimes the company buys back enough of its shares to regain majority shareholder status, which is obtained by owning more than 50% of the outstanding shares. A majority shareholder can dominate voting and exercise heavy influence over the direction of the company.


A company has issued redeemable preferred stock with a call price of $150 per share and has chosen to redeem a portion of them. However, the stock is trading at $120 in the market. The company's executives might choose to repurchase the shares rather than pay the $30-per-share premium associated with the redemption. If the company is unable to find willing sellers, it can always use the redemption as a fallback.

Conversely, if a company currently pays a 3% dividend rate on shares outstanding but has redeemable shares outstanding that carry a higher dividend rate, the company might elect to redeem the more expensive shares, with the higher dividend rate. One advantage to issuing redeemable shares is that it gives a company flexibility if they choose to buy back shares at a later date.

Companies can sometimes buy and sell stock like investors. If a company's executive management believe their stock is undervalued, they may choose to buy back shares at the perceived-discounted price. If the stock price appreciates in the future, the company has the option of issuing shares at the higher price per share, earning a gain from the sale when compared to the original repurchase price.

The Bottom Line 

A repurchase involves a company buying back shares, either on the open market or directly from shareholders. Unlike redemption, which is compulsory, selling shares back to the company with a repurchase is voluntary. However, a redemption typically pays investors a premium built into the call price, partly compensating them for the risk of having their shares redeemed.

For more on repurchases, please read "Why Would a Company Buy Back Its Own Shares?"

  1. 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 >>
  2. Why would I need to know how many outstanding shares the shareholders have?

    Find out why shareholders should know how many outstanding shares have been issued by a corporation, and learn what happens ... Read Answer >>
  3. What are the components of shareholder equity?

    Understanding company valuation figures, such as shareholder equity, is crucial in assessing a business. Read Answer >>
  4. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares for both investors and issuing companies. Read Answer >>
Related Articles
  1. Investing

    The impact of share repurchases

    Share repurchases can have a significant positive impact on an investor’s portfolio and are a great way to build investor wealth over time.
  2. Investing

    Wal-Mart's Share Repurchase Isn't All Good

    Wal-Mart announced huge internal investments along with an aggressive share repurchase program that isn't as good as it initially sounds.
  3. Investing

    Behind U.S. Equities' Declining Buybacks and Dividend Payments

    Learn what a decline in share repurchases and dividend payouts by corporations means for equity markets, and whether it is a cause for long-term concern.
  4. Insurance

    The Share Buyback Report: The Financial Sector

    Examine historical buyback data from the financial sector to determine which quarters and companies contributed the most to repurchase activity.
  5. Investing

    The Share Buyback Report: The Telecom Sector (T, VZ)

    Examine telecommunications sector share repurchase data to identify which companies and catalysts drove buyback trends between 2006 and 2015.
  6. Investing

    How Buybacks Warp The Price-To-Book Ratio

    Relying on price-to-book can get ugly if a company has repurchased stock. Learn why.
  7. Investing

    10 Stocks That Will Thrive On Buybacks

    Buyback Boost: Repurchases are more likely to bolster these stocks
  8. Investing

    Mutual Fund Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  9. Investing

    How to Profit From Stock Splits and Buybacks

    If stock splits and buybacks have been a bit of a mystery to you, you're not alone. Companies may use one of these methods to change their stocks.
  10. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  1. Share Repurchase

    A share repurchase is a program by which a company buys back ...
  2. Share Purchase Rights

    A holder of share repurchase rights has the option to repurchase ...
  3. Direct Repurchase

    Direct repurchase is the buying of shares in a publicly-traded ...
  4. Mandatory Redemption Schedule

    The mandatory redemption schedule includes specified dates when ...
  5. Redemption

    Redemption involves the return of mutual fund shares or the return ...
  6. Partial Redemption

    Partial redemption is a retirement or payment of a portion of ...
Trading Center