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Why do companies buy back stock
Companies usually issue stocks with a lot of fanfare. Most IPOs are well received and companies manage to raise a lot of money by issuing stocks. However, a lot of companies tend to buy their stock back from stockholders. We find out what this buyback means and how it helps a company.
It helps a company retain ownership of the business
Stocks give their owners a fraction of the control or ownership of a company. Over time, companies may find themselves in a position where the actual owners of the company have fewer shares in the company. To retain ownership of the business, companies buy some of their stock back.
Less stocks in the market increase demand for it
If the stocks of a company are easily available, investors often lose interest in them. But buying back stocks, a company is able to lessen the number of stocks available for purchase in the market which allows it to artificially boost the demand for it.
It allows companies to pump more cash into the business
If a company’s stock value has become stagnant and there appears to be no change in its value for an extended period of time, the kind of funds available to the company also becomes stagnant. At this point, if the company has enough cash, it can choose to buy some of its stocks back from shareholders. Since shareholders would want to sell ideally at a price that may be slightly higher than its current value, the company would be able to infuse more money into the company.
It helps a company raise the price of the shares later
If a company’s stocks have stagnated in value, they can easily buy them at the current price. When these stocks are in demand at a later time, the company would be able to sell these stocks at a higher price.