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During a stock buy back they just buy stocks on the open market. They reduce the number of outstanding shares, i.e. number of shares that can be purchased. Th

During a stock buy back they just buy stocks on the open market. They reduce the number of outstanding shares, i.e. number of shares that can be purchased. The value of a single stock is determined by (company value / number of outstanding shares). By reducing the number of outstanding shares, each individual share goes up in value.

seanmcdirmid 4y ago
Often doesn’t the stock go back out as grants to employees? So rather than create new shares, diluting share value, they buy stock to then grant to employees, so the stock buyback is essentially taxed as personal income.
- erichocean 4y ago
  Yes, it's a way for companies with massive profits to route them to their employees (read: executives), not their shareholders.
  - Ekaros 4y ago
    And manipulate the stock prices to look to perform better than it should. They could just pay dividends, but then some argue those would be taxed at time where as buybacks are only if sold later at profit.
    - seanmcdirmid 4y ago
      Dividends are taxed twice, as corporate income then as personal income to whoever they are granted to (at least to Americans, other countries have different tax rules). A buy back is only taxed as personal income when granted to the employee.
      - lotsofpulp 4y ago
        What about the capital gains tax for the entity the company is buying the share from?
        seanmcdirmid 4y ago
        If it is like a 401K fund, the tax is deferred (it will be treated income rather than capital gains later). But they also wouldn't have had to charge tax right away for dividends (dividends are re-invested into the fund, and taxed as income later).
    - JumpCrisscross 4y ago
      > manipulate the stock prices to look to perform better than it should They're taking actions that raise the stock price. That hardly counts as manipulation. (It would count as manipulation if the buyback were conveniently timed to coincide with share-price incentives.)
      - seanmcdirmid 4y ago
        The money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate. It never is of course.
        JumpCrisscross 4y ago
        > money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate Assets decrease. But so does the share count. This tends to raise earnings per share while decreasing assets per share [1]. (Liquid assets, particularly [2].) Meanwhile, there are signaling and liquidity factors which raise the theoretical value of the company. In summary, there is no rule that says a buyback should be share-price neutral. (The same for special dividends.) [1] https://www.nasdaq.com/articles/does-stock-buyback-affect-price-2016-01-03 https://www.nasdaq.com/articles/does-stock-buyback-affect-pr... [2] https://business.inquirer.net/238377/share-buybacks-affect-stock-prices https://business.inquirer.net/238377/share-buybacks-affect-s...
        seanmcdirmid 4y ago
        Assets re-invested back into the company rather than through a stock buyback could have increased earnings/share also. Of course, you eventually run out of things to re-invest earnings into (that could lead to more earnings rather than being wasted), and have to decide whether to do a dividend or a stock buyback.
- JumpCrisscross 4y ago
  > doesn’t the stock go back out as grants to employees? I'd be curious to see a study supporting this claim.
  - seanmcdirmid 4y ago
    It’s definitely a common thing in publicly traded tech. Those stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares. Though I’m not sure how often it happens.
    - JumpCrisscross 4y ago
      > stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares This is how it works. It's why companies report an earnings per share on a fully-diluted basis.
      - seanmcdirmid 4y ago
        It’s how it often works, but buybacks are an option to avoid diluting share price (issuing stock diluted share price, buying it back does the opposite, though should be neutral).
    - MrMan 4y ago
      but debt taken out to fund buybacks is also a form of dilution

seanmcdirmid 4y ago

Often doesn’t the stock go back out as grants to employees? So rather than create new shares, diluting share value, they buy stock to then grant to employees, so the stock buyback is essentially taxed as personal income.

erichocean 4y ago
Yes, it's a way for companies with massive profits to route them to their employees (read: executives), not their shareholders.
- Ekaros 4y ago
  And manipulate the stock prices to look to perform better than it should. They could just pay dividends, but then some argue those would be taxed at time where as buybacks are only if sold later at profit.
  - seanmcdirmid 4y ago
    Dividends are taxed twice, as corporate income then as personal income to whoever they are granted to (at least to Americans, other countries have different tax rules). A buy back is only taxed as personal income when granted to the employee.
    - lotsofpulp 4y ago
      What about the capital gains tax for the entity the company is buying the share from?
      - seanmcdirmid 4y ago
        If it is like a 401K fund, the tax is deferred (it will be treated income rather than capital gains later). But they also wouldn't have had to charge tax right away for dividends (dividends are re-invested into the fund, and taxed as income later).
  - JumpCrisscross 4y ago
    > manipulate the stock prices to look to perform better than it should They're taking actions that raise the stock price. That hardly counts as manipulation. (It would count as manipulation if the buyback were conveniently timed to coincide with share-price incentives.)
    - seanmcdirmid 4y ago
      The money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate. It never is of course.
      - JumpCrisscross 4y ago
        > money used for the buyback makes the company worth less, so it should be neutral if the share price was accurate Assets decrease. But so does the share count. This tends to raise earnings per share while decreasing assets per share [1]. (Liquid assets, particularly [2].) Meanwhile, there are signaling and liquidity factors which raise the theoretical value of the company. In summary, there is no rule that says a buyback should be share-price neutral. (The same for special dividends.) [1] https://www.nasdaq.com/articles/does-stock-buyback-affect-price-2016-01-03 https://www.nasdaq.com/articles/does-stock-buyback-affect-pr... [2] https://business.inquirer.net/238377/share-buybacks-affect-stock-prices https://business.inquirer.net/238377/share-buybacks-affect-s...
        seanmcdirmid 4y ago
        Assets re-invested back into the company rather than through a stock buyback could have increased earnings/share also. Of course, you eventually run out of things to re-invest earnings into (that could lead to more earnings rather than being wasted), and have to decide whether to do a dividend or a stock buyback.
JumpCrisscross 4y ago
> doesn’t the stock go back out as grants to employees? I'd be curious to see a study supporting this claim.
- seanmcdirmid 4y ago
  It’s definitely a common thing in publicly traded tech. Those stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares. Though I’m not sure how often it happens.
  - JumpCrisscross 4y ago
    > stock grants have to come from somewhere, and simply creating new stock dilutes everyone shares This is how it works. It's why companies report an earnings per share on a fully-diluted basis.
    - seanmcdirmid 4y ago
      It’s how it often works, but buybacks are an option to avoid diluting share price (issuing stock diluted share price, buying it back does the opposite, though should be neutral).
  - MrMan 4y ago
    but debt taken out to fund buybacks is also a form of dilution