A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for various reasons, including:

• Investing in themselves: A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on the market increases the proportion of shares owned by investors. A company may feel its shares are undervalued and do a buyback to provide investors with a return.

• Compensation purposes: Companies often award their employees and management with stock rewards and stock options, and a buyback helps avoid the dilution of existing shareholders.

• Demonstrating financial strength: A share repurchase can demonstrate to investors that the business has sufficient cash set aside for emergencies and a low probability of economic troubles.

• Sterilization: One major purpose of buybacks is sterilization, which is the cancellation of shares that are otherwise issued to employees when their stock options or restricted stock rewards and benefits are issued. In other words, the total number of shares does not increase, as the buybacks sterilize the normal growth in share growth.

There are two types of buybacks: tender offer and open market offer. Companies can choose either of these methods to buy back shares from their shareholders. In a tender offer, the company offers to buy back shares from shareholders at a premium to the current market price. In an open market offer, the company buys back its shares by actively buying from sellers on the exchange.

A share buyback can have benefits for shareholders, including increasing the proportion of shares owned by investors and potentially increasing the share price. However, not all companies execute buybacks properly, and some investors see them as a waste of money.