Why Does a Company Repurchase Stock?

by Sara Melone ; Updated July 27, 2017
Some companies issue a buyback plan for their public shares.

In some cases, a publicly traded company issues a stock buyback or share-repurchase plan. This move signals that the company is going to purchase some or all of its outstanding shares. It might issue an offer to current shareholders to tender outstanding shares for an agreed-upon price. Or the company might simply complete a purchase transaction of its shares at any time on the public stock market.

Investing in the Company

Many companies that issue a share repurchasing order will state that the goal is to invest in the company. Any publicly traded company is in business to increase the return on investments and to maximize the company profits on behalf of the company shareholders. A stock-repurchase plan can often help to generate more interest in a company stock, and it might even increase the value of a company's stock for increased revenue and return to all existing stockholders.

Increasing Shareholder Profits

A stock-repurchasing plan can help improve shareholder profits for all remaining shareholders of a company, because essentially when company shares are repurchased by the issuing company, those shares are automatically reabsorbed into the company's financial assets. The number of outstanding shares available for stockholder purchase on the open market is reduced by the number repurchased by the company. Because the supply of shares is reduced, the demand might increase, along with the purchase price of the remaining shares. The rising share price benefits stockholders who retain company stock.

Building Investor Confidence

Some companies choose to invest in a stock repurchasing plan to steel investor confidence in the company. Repurchasing company stock shows the investors that the company maintains confidence in the stability and future success of its company operations. An investor could reason that a company would not waste good money purchasing worthless company stock if the company were headed for catastrophe. A company stock repurchase can boost investor confidence enough to create a buying surge of the stock.

Driving Up Demand

Attempting to increase stock demand is another reason a company might choose to repurchase its stock. When a company decreases the number of open shares on the market, the supply is significantly reduced. If investors have taken little notice of a particular stock, reducing the availability of shares can create a level of exclusivity that stimulates interest in the stock.

Gaining More Control

Some companies use a stock-repurchase plan as a means to gain more control of the company itself. When a company is publicly traded, decisions regarding the company future are based at least in part on the votes of the shareholders. Some companies seek to regain private control by regaining the public stocks gradually with buyback programs.

About the Author

Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.

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