Question

A new investor lined up at the Dyer and Blair Investment counter to buy his first set of securities ever in his life. While at the queue, he overheard a conversation from some people, also in the queue, regarding the shares of Glovu ltd that he hadn’t considered buying. One of the men retorted, “This Glovu ltd just made a share repurchase and I think I should increase my holding therein as the prices are going to increase in a short while”. His colleague nodded in approval and retorted that he didn’t have any current holdings in that counter, but he too was going to seek margin purchases of that security to make a profit on the obvious upside.

This conversation created a great deal of anxiety and confusion to the new investor and for some time, he contemplated changing his mind on the choice of securities.

Required:

Tender a well-reasoned case highlighting the best course of action available to this new investor. If possible anchor your response on appropriate theory with practical but hypothetical examples.

Answer 1

Share repurchases are generally done at a premium to their current market price of company, The company will be trying to purchase the shares from the investor's when they will be feeling like the shares has gone down and it has upward momentum left and it can be taken as a sign that the management of the company is bullish on the prospects of the company because the company management itself is going out the shares of the company from the market because it was to gain on the upside of the company & the future of the companies on a upward trajectory and it will be resulting in to the gain of the share price because of the estimation by market participants of the turnaround of the company and bullishness of the management of the company.

But,it is not always the case because company management is also buying out this share in order to decrease the free float in the market and they may be trying to engage into such tactics which will be increasing their overall share prices and hence investors should not always jump into buying a share based upon just the share repurchase but he should also look for the fundamental of a company.

if I had to provide an example regarding share repurchase then repurchases of the shares which has been made by various companies like HEG and PC JEWELLERS often turned out to be a higher than their current market price and they were not able to infuse momentum in share price because they bought at the top and share prices corrected since then, so it is not always a good deal to buy shares just on the news of share repurchase.