Share buybacks, or share repurchase programs, occur when a company buys back its own shares on the marketplace, technically reducing the number of its outstanding shares. A share buyback is usually indicative of a company’s management thinking the shares are undervalued.
Publicly traded companies buy back shares for a number of reasons. By reducing the number of shares still available, they can increase the value of outstanding shares. Companies also purchase shares to eliminate a threat of a shareholder looking to acquire a larger, controlling stake.
Share buyback programs can also help companies announce stronger earnings. For example, if a company earns $10,000 and has 100,000 shares outstanding and one year later earns $10,000 and has 90,000 shares, its earnings will be $0.11 per share versus $0.10, or 10% higher.