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Do buybacks actually increase stock price? If a company buys back $1M in stock, that means it has $1M less in its bank account (meaning the company is now worth

Do buybacks actually increase stock price? If a company buys back $1M in stock, that means it has $1M less in its bank account (meaning the company is now worth $1M less), but also $1M less stock is in circulation. Mathematically I would expect the price to stay the same.

loeg 7y ago
https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...
- Thorrez 7y ago
  Hmm, so the reasons given for the price going up seem to be: 1. It signals to investors that the company is confident and low risk. (Research and development is considered high risk.) 2. It makes the company more purely itself, it doesn't have shares backed by cash that drag back its price growth. If people expect future growth this means that growth per share will be higher, so they would start buying now to get some of that future higher growth. (Of course in addition to magnifying growth it also magnifies decline.) An interesting thing is that this article says > Stock buybacks can have a mildly positive effect on the economy overall. Which seems to contradict what that previous article said. This article also says that stock buybacks will cause other companies to do more research and development.
jacobkranz 7y ago
I’m the short-term, yes. The assumption is that the company cannot invest the cash into its operations at a larger rate of return than an individual investor could therefore the company (whose sole purpose is to enrich the shareholders) should return the cash. In a way, the company has an earnings yield of EPS/stock price (or inverse PE). If the company cannot invest the money in its operations that makes a larger return that the earnings yield then the stock is actually a better investment. The huge issue is that when markets crash is when technically a company should be buying back tons of its stock but rarely do companies ever do this and instead elect to hoard cash when buybacks are best & spend money on buybacks when it’s the worst ROI (when the market is hot & earnings yield is minimal).
dwohnitmok 7y ago
The price of a stock has only an indirect relationship to the abstract value of a company. The current price of a stock is simply the highest buy order that is not yet fulfilled by a sell order. So if a company just keeps offering to buy stock at a high enough price to match existing sell orders it'll push the price of a stock up. Whether that's sustainable in the long run is a different story, but there's no ironclad mathematical relationship.
- Thorrez 7y ago
  Yes, but investors who see that the company's coffers keep shrinking might sell exactly enough to counteract the buys. My question is whether there's any logical reason for investors not to exactly counter the buys with matching sells.
- deleted 7y ago
  [deleted]

loeg 7y ago

https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...

Thorrez 7y ago
Hmm, so the reasons given for the price going up seem to be: 1. It signals to investors that the company is confident and low risk. (Research and development is considered high risk.) 2. It makes the company more purely itself, it doesn't have shares backed by cash that drag back its price growth. If people expect future growth this means that growth per share will be higher, so they would start buying now to get some of that future higher growth. (Of course in addition to magnifying growth it also magnifies decline.) An interesting thing is that this article says > Stock buybacks can have a mildly positive effect on the economy overall. Which seems to contradict what that previous article said. This article also says that stock buybacks will cause other companies to do more research and development.

jacobkranz 7y ago

I’m the short-term, yes. The assumption is that the company cannot invest the cash into its operations at a larger rate of return than an individual investor could therefore the company (whose sole purpose is to enrich the shareholders) should return the cash. In a way, the company has an earnings yield of EPS/stock price (or inverse PE). If the company cannot invest the money in its operations that makes a larger return that the earnings yield then the stock is actually a better investment. The huge issue is that when markets crash is when technically a company should be buying back tons of its stock but rarely do companies ever do this and instead elect to hoard cash when buybacks are best & spend money on buybacks when it’s the worst ROI (when the market is hot & earnings yield is minimal).

dwohnitmok 7y ago

The price of a stock has only an indirect relationship to the abstract value of a company. The current price of a stock is simply the highest buy order that is not yet fulfilled by a sell order. So if a company just keeps offering to buy stock at a high enough price to match existing sell orders it'll push the price of a stock up. Whether that's sustainable in the long run is a different story, but there's no ironclad mathematical relationship.

Thorrez 7y ago
Yes, but investors who see that the company's coffers keep shrinking might sell exactly enough to counteract the buys. My question is whether there's any logical reason for investors not to exactly counter the buys with matching sells.
deleted 7y ago
[deleted]