A share buyback is when a company uses its cash to repurchase its own shares from investors on the open market. The repurchased shares are removed from circulation, reducing the total number of shares outstanding. This increases the ownership percentage of remaining shareholders. Buybacks can affect earnings per share and return capital to shareholders who choose to sell.
A company has 1 million shares outstanding and $10 million in cash. It announces a buyback and purchases 100,000 of its own shares at $100 each, using $10 million. Now only 900,000 shares remain outstanding. If the company earns $90 million in profit, the earnings per share increases from $90 to $100 because profits are divided among fewer shares.
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