Share buyback definition

What is share buyback?

Share buyback, or share repurchase, is when a company buys back its own shares from investors. It can be seen as an alternative, tax-efficient way to return money to shareholders. Once shares are repurchased they are considered cancelled, but they can be kept for redistribution in the future.

Learn how to trade stocks

Find out more about share trading, including how to build a trading plan and open a position.

Why do companies repurchase shares?

A company might choose to repurchase shares for many different reasons, but the main reason is that its stock is undervalued, and the company wants to increase demand. Share buybacks reduce the number of shares in circulation, which can increase the share value and the earnings per share (EPS).

To calculate earnings per share, the company’s net income is divided by the number of shares in issue. By reducing the number of shares, EPS will naturally go up. For example, if the company’s net income is $1 million and there are 10,000 shares outstanding, the EPS is $100. But if the company buys back a portion of its shares, the EPS will increase.

Share repurchases can create a positive impression with the public, by assuring them that the company has enough cash to repay its investors. However, it could also create a negative outlook, by encouraging the belief that the organisation doesn’t have any growth potential.

Example of a buyback

Let’s say company ABC has $20 million in cash and 1 million shares in issue, trading at a price of $10 per share. If ABC buys back 150,000 shares, using $1.5 million in cash, it’s left with 850,000 shares in circulation and $18.5 million in cash.

The stock price will likely rise due to the reduced supply and so will the earnings per share.

Build your trading knowledge

Discover how to trade with IG Academy, using our series of interactive courses, webinars and seminars.

A - B - C - D - E - F - G - H - I - L - M - N - O - P - Q - R - S - T - U - V - W - Y

See all glossary trading terms

Contact us

Our office is open 5 days a week Monday to Friday from 9am to 6pm. Support line is available 24hrs a day from 8am GMT Saturday to 10pm GMT Friday

+65 6390 5118

You can also email us helpdesk@ig.com.sg

Visit our storefront office at 9 Battery Road #01-02 MYP Centre Singapore 049910