What is Buyback of Shares? [ Beginner’s Guide ]:

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Coming back to our today’s article, it is purely on Buy-Back of Shares.

In current times, you must have heard a lot about this term in the stock market as many companies are doing this activity of buying back the shares.

Now, let’s move and check out what it means and how it impacts that particular company.

So, this article is purely base on “What is Buy Back of Shares?”

What is Buyback of Shares?

Buying Back of Shares means when a particular company buys his outstanding shares to decrease the number of shares available in the open market.

There are many reasons that the companies come up with buying back of shares, such as to increase the value of the remaining shares available in the open market after reducing the supply of other shareholders from taking a controlling stake.

Through this activity by decreasing the number of shares outstanding, that impacts in inflating the earnings per share and often the value of stock.

 This buyback of shares has a positive impact in the company, first of all, the value of the shares is increasing, and another advantage is that the company will hold a sufficient amount of cash set aside for the emergencies or any economic problems.

There is also a reason for buying back the shares as a way to use it in better opportunities for investing in the projects that will avail them or improve their future profits and earnings.

So, this was about the concept of “Buy Back of Shares”.

Now, moving further let’s talk about the Process of Buyback of Shares.

Process of Buyback of Shares

  • Once the Company decides to do a buyback of shares, after accepting this decision by most of the shareholders, then only the process starts.
  • Then the Company comes up with a significant amount and with a price per share that indicates the number of shares they want to purchase back from the shareholders.
  • This is the way the company announces the Buyback process by entitling the above information.

For Example: Let’s take an example of Wipro.

Wipro announced Rs 11,000 crore buyback offer at Rs 320 per share to purchase 34.37 crore shares held by the shareholders.

 The above mention pointers show how the activity begins for the process of Buyback of Shares.

Now, let’s see how this will benefit the Retail Investors.

Benefits of Buy Back to Retail Investors

  1. Retail investors can also use these opportunities to tender their shares which may be trading at a value lower than the offer price.
  2. This activity will give the benefit to the shareholders, as in this scenario, the more the shares are accepted at the offer price, the higher the profits for shareholders.
  3. As the norm has been passing for the retail investors that they have 15% allocation in the buyback of shares, this increases the chances of shares getting accepted as compared to institutional buyers.
  4. The more the number of shares in the buyback process it reduces the chance of increasing the earnings per share of the company, and therefore, it creates more value to the retail investors.

For the retail investors, they should know about the Entitlement Ratio and Acceptance Ratio.

Let’s talk about these Ratios:

Entitlement Ratio and Acceptance Ratio

1. Entitlement Ratio

  • The Entitlement Ratio is the ratio of shares which the retail investors have offered in the buyback with the comparison to the total number of shares held in the overall retail investor category.

2. Acceptance Ratio

  • The Acceptance Ratio states about how many shares the company will be able to accept in the buyback offer for every 100 shares submitted by the Shareholders.

Now, you might be in thought about why a company do this activity.

So, for that, let’s find out the reason for Buyback of Shares.

Reason of Buying Back of Shares

  1. The company comes up with buying back of shares to increase the value of the share by reducing the supply of the shares in the open market.
  2. To eliminate any kind of threats by the shareholders who may be looking for a controlling stake.
  3. When the company is aware that their shares are undervalued and will perform better in the upcoming quarters then also they opt for buying back the shares at a lower price and will sell it later on at higher rates.
  4. Sometimes, the companies buy back their shares having different perspective like Compensation, Rewarding their employees with the stock option after the Buy-Back. 

Conclusion

From this topic on “What is Buy Back of Shares?” it focuses mainly on the fundamental understanding regarding why the companies do this activity and how it will benefit the retail investors and the reason behind the Buyback of Shares.

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Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.