What is a stock buyback?

A stock buyback, also known as a share repurchase, occurs when a company uses its own cash to buy its outstanding shares from the open market.

When a company repurchases its stock, those shares are typically retired or held in the treasury, which reduces the total number of shares available to the public.

Here is what that usually means for investors:

• Earnings Per Share (EPS) increase: Because there are fewer shares left in circulation, the company’s earnings are divided among a smaller pool of shares. This often makes the company look more profitable on a per-share basis.
• Signaling: Companies often initiate buybacks when they believe their stock is undervalued, signaling confidence in their future performance.
• Returning capital: It is one way for a business to return excess cash to its shareholders, similar to a dividend, but it often carries different tax implications.

Think of it as a company shrinking its "pie" so that each remaining slice represents a slightly larger piece of the business.