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The Truth About Stock Buy Backs

By Jason Markum

I don’t know about you, but stock market investing is incredibly difficult for me! There’s just so much to know, and it can all be so confusing at times, that the slightest little error on my part can wipe out everything I’ve worked so hard to build over the last ten to fifteen years! But I keep plugging away, learning more and more as I go, and slowly but surely I make progress.

Over the years I’ve learned several valuable things about the stock market. Today I want to write a short little article about one of those things that you may not ever have put a lot of thought into, but is vitally important to your stock market strategy.

The thing I’m talking about is Stock Buy Backs.

First of all, what exactly is a stock buyback? Often times a company will offer to buy back shares at a premium price. That means they’re willing to give you more money than the stock is currently worth. Many times investors aren’t sure whether or not to accept such a deal and that’s one of the reasons why I wanted to write this article today.

Why do companies offer to buy back their stock? Well, there are many different reasons. Sometimes a company is sitting on a large pile of cash after having a particularly good quarter or a particularly good year and they need to do something with that cash besides let it sit there. Buying back some of their stock is a good way to return that money to their investors at a lower tax rate.

Otherwise they may have to pay taxes on it and then pay it out in the form of a dividend, at which point the investors themselves will have to pay taxes on the dividend. Stock buybacks can get around some of the.

Another reason why a company may offer to buy back some of its stock is because that it feels that the stock is under priced at the moment and therefore is a good investment in itself. This is a bit of a self fulfilling prophecy because when a company buys back its stock, it by definition increases demand and decreases supply whenever you increase demand and decrease supply, the price always goes up.

Another reason why a company may offer to buy back some of its stock is a little more cynical. Many times company insiders own a lot of stock themselves and having the company buy back that stock is a way for them to, in effect, pay themselves a bonus. No company will ever say that this is the reason why they are buying back stock, but you can always find out by watching the levels of corporate insider stock holdings which are publicly available.

So should you accept a stock buyback? The answer is almost always yes! Many times a company will offer a premium over the current stock price, sometimes as much as 10% or more above market levels. Studies have shown that if you hold onto your shares, the chances that they go up more than 2% or 3% in the months that follow are slim. Meaning you would have been much better off accepting the buyback offer.

There is a bad side as well because when a company buys back stock it means that they’re using their own cash, which means they won’t have that cash anymore to invest in the company by way of hiring more employees, building more factories, increasing marketing, etc. which may impact the profits of the company in the future which may cause the stock to go down in the future. Which means you should have sold your stock when you had the chance!

So there you have it, everything you ever wanted to know about stock buybacks. Now you can make a much more informed decision the next time a company offers to buy back its stock from you.

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