Stock or share buyback is a practice wherein companies focus on purchasing their own shares from the existing shareholders through the best share market app, an open market or a tender offer. In this situation, the price of the specific shares is comparatively more than the existing market price.

Whenever a company decides to go for an open market mechanism for repurchasing shares, it can also perform this process through the secondary market. However, on the other hand, a company opting for the tender offer must avail the same by tendering or submitting a certain part of their shares under a given period. It can also be considered as a means to reward the existing shareholders instead of offering timely dividends.

Company owners might have different reasons to repurchase their stocks through the best trading app. An individual must look out for points to find the causes to make the best benefit out of these decisions accordingly.

What are the reasons for share buyback?

There are a number of reasons why any company decides to repurchase their shares. However, the most common reasons are listed below –

• Excess cash without enough projects for investment – companies might issue shares to increase equity capital and expand their venture. However, at times these practices do not prove to be very beneficial. Similarly, holding excess money in your bank accounts is similar to truncated cash flow, offering liquidity over the ideal requirements. Hence, instead of collecting bundles of cash, companies with good financial standing decide to make the best possible use of their funds by repurchasing their stocks or shares through their brokerage account.
• Tax-effective, rewarding option – share buybacks are very tax effective for the shareholders and companies compared to dividends. Stock buybacks are only subjected to DDT, and a certain amount of money is minimized before earnings are distributed to the surrounding shareholders. On the other hand, a dividend is taxed at three separate levels.
• To signal an undervalued stock – sometimes when a certain company moves ahead to repurchase its shares. It also means that the company considers that its shares are undervalued. Apart from serving as a remedy for this situation, repurchasing shares helps Form a positive picture of the company’s current valuation and prospects.

Impact of share repurchase

• Effect on EPS (Earnings per share)– A direct impact is seen on EPS by repurchasing a company’s shares with an increased ratio. It basically happens as the net income tends to remain unchanged when the total number of outstanding shares decreases post-purchasing.
• Effect on company’s portfolio – usually, a company has faith in its prospects and decides to repurchase its shares. This display of confidence receives a positive response from potential investors and current shareholders, helping to earn their trust significantly. Moreover, a company’s reputation is enhanced, which naturally facilitates an increase in its shares’ value. Altogether, it helps to improve the company’s portfolio significantly.

Earlier, share repurchases were considered capital gains and were also subjected to capital gain tax. However, after July 19, investors need not pay such a tax on their earnings through a stock repurchase. Conversely, companies are entitled to take away 20 percent of the total profits generated as DDT before distributing them amongst the shareholders.