What Is the Stock Buyback Theory?

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The theory behind stock buybacks are that the investor will feel better if they are allowed to sell back their shares in a company, value may be added to stocks for existing shareholders, and it might ward off hostile activity. Discover how companies cut expenses by having fewer shares on the market with information from a financial analyst in this free video on the stock market.

Part of the Video Series: Stock Market Tips & Facts
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Video Transcript

We're mad as hell and we're not going to take it anymore. That's what shareholders say when the share prices constantly moving down of the stock that they own. Hi I'm Roger Groh with Groh Asset. When that starts to happen, one of the things that a company typically will do is they will authorize the management team of that business to buy back shares in their own company on the public market. Sometimes they set a price that they're willing to do that far below what the current market price is only they don't tell you that. They disclose it if you really want to look but what you hear is that there's going to be a stock buyback program. That makes you the investor feel a little bit better. But really what's the purpose of it? Well there could be a couple. Number one, it's a terrific way to add value back into existing shareholders if it's done correctly. Meaning let's say that a year ago shares were sold at 20 dollars and today the stock's at 10. Well if they're buying it back, really they're adding value into your own holdings by doing that. It's a great way to return value to shareholders. Number two, it might be a way to ward off any sort of hostile activity meaning there are fewer shareholders for the management team to worry about and as a result, it can reduce the likelihood of a takeout. Last but not least, well believe it or not it's expensive to track all of the shareholders that exist in public companies and to the degree that you have fewer shares, you cut your expenses. You think that's a wild idea? That was the whole reason that Berkshire Hathaway always had such a high stock price, at least according to Warren Buffet. So that's a little bit about stock buyback theory. You're hoping to sell it expensive and buy it back cheap. I'm Roger Groh with Groh Asset and thank you very much for spending time with me.

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