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It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now go

It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. Of course markets are not perfect, and nobody knows for sure if the market value of the company is fair or not. When a company engages in stock buybacks, it’s essentially saying that it believes its stock to be undervalued, which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run. After all, who has better information about the company and its prospects than itself? But as they say, the market is a voting machine in the short run, but a weighing machine in the long run. If it turns out that the market value of the company is higher than its intrinsic value, then stock buybacks are actually destroying shareholder value. The cash would have been better spent buying shares in an index fund.

JumpCrisscross 9y ago
> In a perfect market, the market value of the company will go down when company buys back stock Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.
- arcticfox 9y ago
  Right, it depends whether "market value" is referring to share price (your example) or market cap (which indeed should go down).
  - adamlett 9y ago
    Yes, I was referring to market cap.
thaumasiotes 9y ago
> which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.
- adamlett 9y ago
  It’s “surprising” because—assuming the company is correctly valued by the market—the company should become less valuable when the cash is spent. The company doesn’t “get” anything for the money, because the shares it buys, get retired. Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).
pathseeker 9y ago
>It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie. Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.
- adamlett 9y ago
  You have a larger piece of a smaller pie, but you have the same amount of pie. Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.

JumpCrisscross 9y ago

> In a perfect market, the market value of the company will go down when company buys back stock Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.

arcticfox 9y ago
Right, it depends whether "market value" is referring to share price (your example) or market cap (which indeed should go down).
- adamlett 9y ago
  Yes, I was referring to market cap.

thaumasiotes 9y ago

> which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.

adamlett 9y ago
It’s “surprising” because—assuming the company is correctly valued by the market—the company should become less valuable when the cash is spent. The company doesn’t “get” anything for the money, because the shares it buys, get retired. Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).

pathseeker 9y ago

>It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie. Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.

adamlett 9y ago
You have a larger piece of a smaller pie, but you have the same amount of pie. Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.