What is meant by buy back of stocks? Its advantages and disadvantages.

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Buyback of stocks is a process where company purchases shares from stockholders or in open market.Company buys its stocks at a premium to the current market price . They do so with an aim of conveying positive message to its stockholders that they have really good confidence in their company. Along with this a company may have several reasons to do so. Referring financial advisory services while trading helps market participants to improve their trade results.

Some of the advantages of buyback of stocks are discussed below:

1) At times companies have excess cash which they are not using as they do not have enough opportunities for expansion. This cash can be used for buying back stocks as idle capital is no going to help in bringing any income and by doing so they can use cash in an efficient manner.

2)When a company buys back its stocks it conveys a positive message to its shareholders and further enhances their confidence by making them believe that management is sure that in future they will perform well and their stocks price is most likely to rise.

3) Buyback of shares reduces the chances of takeover of company by some other company as promoter stake increases.

How stockholders are benefited ?

1) As company buy backs at premium there are chances that it will increase the price of stocks.

2) Number of outstanding stocks gets reduced when company buy back stocks and traders may find eps attractive as eps = net profit/outstanding shares.

Some of the disadvantages of buyback of stocks are discussed below:

1) Excess cash is used for buying back stocks it includes opportunity cost as well and company often neglects opportunities like expansion of its business units, boosting of sales, increasing their number employees. Hence company is not using that money for some productive work.

2) Promoters may have wrong intention of giving a false signal and increasing their stock price so that they can sell them.Therefore investors must check about company’s history if in past they have done something like this then what were their intentions and do not get tricked.

3) Stockholders may frame negative image of company in their mind that they are not finding good opportunities to expand their business and using their excess cost for buying back shares.

As discussed above buyback has several advantages and disadvantages, companies should be careful while doing so. Traders of stock market should be aware of this strategy used by companies as sometimes they may have negative intentions also. While trading in market traders faces many difficulties because of which they are not able to earn well. Experts recommendations on mcx tips , trading tips and more can be used for ensuring good returns and achieving trading goals. Their are financial advisory services provider which can be consulted for such experts advise.

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