Share Repurchases: Understanding the Impact on Investors

Many times a company will utilize a share repurchase in order to influence the market. A share repurchase is when a corporation goes out into the marketplace and buys shares of their own stock. Here are the basics of a share repurchase and how it affects other investors.

Share Repurchase

Typically, a share repurchase occurs when a company believes that their share price is undervalued. By decreasing the amount of outstanding shares, they hope to bump up the value of the price of their shares. They will essentially be purchasing the shares from a certain group of investors, which will leave other investors in the minority of still being owners in the company.

Affect on Investors

The share repurchase affects investors that still have shares in the company. Most investors like to hear of a share repurchase because it will mean an increase in the price of their shares. By decreasing the amount of shares outstanding, this will significantly increase the earnings per share. When earnings per share increases, this tends to have a positive effect on the price of the shares in the market place. The investors that end up selling their shares back to the company might be disappointed to see the increase in stock price after they sell.