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The information on this site does not modify any insurance policy terms in any way. There can be several reasons to make such a decision:. Stock-buyback programs differ from dividends in that there's no immediate, direct benefit to shareholders: With a dividend, shareholders get cash. But shareholders do benefit indirectly from a buyback or repurchase program, as the goal is generally to raise the company's stock price. The idea is that by taking shares out of circulation, the remaining shares will be worth more.
Think of the company's overall value as a pie: If it's cut into fewer slices, each slice will be bigger. Of course, it doesn't always work out exactly that way in practice.
On one hand, just the announcement of a share-repurchase program is sometimes enough to give the stock a boost, before the company has bought any shares. On the other hand, sometimes there's unfavorable news or a shift in the market while the company is in the process of buying its own shares. In that case, its shares might trade lower for a while even thought the total number of shares outstanding has been reduced by the buyback.
Generally speaking, though, a share-repurchase program will tend to boost the stock's price over time. That's not just because of the reduced supply of shares, but because buybacks tend to improve some of the metrics that investors use to value a company. Share buybacks reduce the company's total number of shares outstanding and the total amount of cash on the company's balance sheet. Those changes affect several metrics used by investors to estimate the value of a company. Once shares are repurchased, they are generally either cancelled entirely -- wiping them out of existence -- or kept by the company as treasury shares.
Treasury shares are counted as issued shares, but not as outstanding shares. Reducing the number of shares outstanding affects calculations such as earnings per share, which in turn affects a widely used valuation metric, the price-to-earnings ratio. If total earnings stay constant, but the number of shares outstanding falls after a buyback, the company's earnings per share will rise.
Taking that one step further, if the company's stock price stays constant but earnings per share rise, its price-to-earnings ratio will fall. Buybacks also reduce the amount of cash on a company's balance sheet.
That in turn increases return on assets , because the company's assets cash have been reduced. In the case of an on-market buyback, an investor will make either a capital gain or a capital loss, depending on what was paid for the asset. A capital gain needs to be declared on your tax return and added to income, while a capital loss can be carried forward to offset other capital gains. Tell me more. This article is intended to provide general information of an educational nature only.
It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account.
Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
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