(2) Creating A Level Of Support For Stock During Recession Or Market Correction
It is one of the most popular reasons for company’s share buybacks. Stock markets are highly volatile in nature. It is perhaps due to the ability of stock markets to reflect market sentiments or business realities on the prices of individual stocks.
Generally, stock volatility increases during economic slowdown or recession as well as during economic progress or turnaround.
An increase in stock price is always welcomed by huge community of investors & traders. On the other hand, a decrease in stock price is always considered bad for the underlying company.
When a stock is falling madly during periods of sluggish market conditions or recession then shares buyback could be a solution. Shares buyback acts as an artificial way of supporting the share price from falling down significantly at least for a limited period.
Thus, it creates a level of support for the concerned shares by absorbing them from open market.
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(3) Taking Advantage Of Buying Undervalued Stock
It is one of the most reasonable reasons for company’s share buybacks. Stock investors & traders are always looking to take advantage of price fluctuations in stock market.
Business organizations are not a different thing in this regard. Like other investors & traders, companies are also looking to buy their own shares when they are undervalued.
Generally, a stock is considered undervalued when it is trading below its conservatively calculated intrinsic value. Shares can be undervalued despite good fundamentals for a number of reasons.
Some of the reasons responsible for short-term stock undervaluations include sensational or negative news items, general bearish sentiments, one-time scandal, or failure to meet expected earnings predictions & many more.
Simultaneously, stock buyback sends a positive signal to the market. It indicates that management & promoters think that the stock price is undervalued in current scenario.
After purchasing shares in a buyback offer, companies can either cancel them or hold them in treasury for re-issue to other investors later at higher price. Thus, share repurchase is a great way to take advantage of such stock undervaluations from time-to-time.
- Reasons Behind Company’s Buyback Offer: Shutterstock