Overview of Share Buybacks
In the United States of America the share buybacks are also termed as stock repurchases and equity repurchases. The share buybacks are important parts of the dividend decisions taken by present day companies.
Methods of Share Buybacks
There are some methods by which business entities buyback shares like the open market purchase method and the tender method. Of both the methods of share buybacks the companies consider the open market purchase method to be more conducive.
The main reason behind this assumption is that the open market purchase method provides enhanced levels of freedom with regard to the time of purchase as well as the price at which to buy these shares.
Open Market Purchase Method
The open market purchase method is a type of share buyback method. As per this method the companies buy shares from the secondary stock markets. The companies buy shares for a year. The management of the companies determines a price and the companies are supposed to buy the shares within that limit.
The tender method is another way of share buyback. It is extensively used by the present day business entities. According to the tender method the companies purchase back their shares at prices that are fixed and at a period, which is fixed as well. This period normally never extends beyond a month.
Advantages of Share Buybacks
There are certain advantages of share buybacks:
Absence of Implied Commitment
Proper Distribution of Monetary Resources
Consistency in Price
Benefits related to Taxation
Share buybacks help the companies to distribute their resources in a better way. If the companies buy back their shares then there would be a certain degree of consistency in the prices of their shares in the stock market.
Laws associated with Share Buybacks
Throughout the different countries of the world there are laws that govern the buyback of shares by business entities. The laws are generally concerned with some basic issues like the percentage of shares a company can buy back. For example, in India the Securities Exchange Board of India and the Companies Act regulate the buyback of shares.
Last Updated on : 27th June 2013