How Do Stock Buybacks Work?

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Stock buyback programs are a way to return capital to investors by retiring the number of outstanding shares to inflate the earnings per share. Find out why stock buybacks need to be cleared by a board of directors with help from a personal asset manager in this free video on investing in the stock market and money management.

Part of the Video Series: Stock Market
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Video Transcript

I'm Roger Groh. We're here today to talk about stock buyback programs, what are they, why would you use them and how do they work. Well stock buyback programs are really a way to return capital to investors by retiring the number of shares outstanding and therefore inflating the earnings per share of the remaining shares that are in the out in shareholders hands. How does it happen? Well much like when you buy or sell stocks for your own account, a company does the same. They have a broker and the company then says to the broker buy our stock up to x price. That is after the board of directors has passed an amendment saying that that may happen. Has to be cleared by the board first. And some amount of money has probably been set aside for that occurrence. It's a way to return equity to shareholders, increase earnings per share and buyback what amounts to cheap stock. Also, it's a way to provide for stability in the common stock especially if there's a large sell order and there are no buyers. No company wants to have their company stock go to zero so as a buyer of last resort the company is always there. It happens frequently if you look in the back of Barron's or you look in the back of the Wall Street Journal everyday you can read about stock buyback programs, how they're going, what companies have them, how much money has been allocated and how much money has been spent. So I'm Roger Groh and that's a little bit about stock buyback programs.

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