Question

Is stock buyback a good or bad finance practice?

Answer 1

Stocks buybacks are always viewed as a benefit making practice by various companies through purchasing of their undervalued stock.

There could be various benefits associated with share buybacks-

A. It helps in Creating a level of support for the stock especially during a market correction.

B. it also helps in increasing the share prices of the company because the people think that the company itself thinks that their shares are undervalued.

C. It means that the shares are below their intrinsic value and it helps in company to gain adequate chunk of their control back at a lower prices than intrinsic value.

Disadvantages of share buybacks are as follows-

A.it is used to mask various kinds of financial problem that companies facing by giving an artificial lift to the stock.

B.it allows the executives of the company to take advantage of stock options program while not diluting the earning per share.

C. It can create a temporary upside movement in the stock prices, and those who buy into that upside movement will get trapped in the long run.

It is said that buyback can be both advantageous and disadvantageous for the company depending upon various scenarios, but it is used for returning the money back to the shareholders by the company and it also gives a signal that the company have adequate cash on its books of accounts.