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Jan 21 2013

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Why Companies Buy Back Stock

Repurchasing of stock is an alternative to paying out dividend to shareholders. In the process of stock repurchase, the firm pays cash to repurchase stocks from the market in order to reduce the number of outstanding shares in the market. It also may be done through treasury stock method.

The stock repurchase option has been increased greatly over the past few years by different firms around the world due to keep control its shareholders power. However, stock repurchase option is not regular exercise by every firm rather it is exercised when any negative impact of stock price is likely to happen.

To the firm, there are some advantages over stock repurchase option and they are as follows:-

  • When company has excess cash on hand and presently there is no further investment plan, the management may decide to repurchase stock from the market rather than paying higher dividend to shareholders
  • Treasury stock can be used for future acquisitions or used as a basis for stock option.
  • When management is holding stock, they would prefer stock repurchase rather than a dividend because of the favorable tax advantage.
  • Treasury stock can be sold to the market as and when the firm needs additional funds for investment.

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  • Loyce Parkin

    Now I see the reason why Apple are making a stock buy back last month. The favorable tax advantage could be the reason why, because they always have plans for innovations and improvements so that will be out of the context. Now this things matter to me since I am dealing with binary options affiliate programs and Apple is one of my favorite asset to trade.