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How to benefit from a Share Buy back?

Posted By On 12/10/2008 08:03:00 PM Under
1. In order to understand share buy back one can consider the same as purchasing the shares back from the market. Companies undertake the buying back of shares at a premium to the current market price or companies can undertake the action of buying through the share holders at a fixed price and the same is undertaken as per proportionate basis. Last but not least the resort is to buy from the open market. Keep on reading to understand the benefits of share Buy Back for company and the stock holders and how one can use the opportunity to make money.

2. Benefits of Share Buy Back

(a) Buy back can be undertaken to stop the fall in stock price.
(b) Company has a faith in its own capability and thus want to increase its own promoter holding.
(c) A remarkable way for deploying the cash reserves. (d) return ratio of a company increases by buy back.

3. Benefit to Share Holders

(a) Increase in share price in case buyback is at a premium.
(b) Reduction of outstanding shares and thus improvement in EPS (EPS is calculated by dividing net profit by outstanding shares). The ROA (Return on Asset) and ROE (Return on Equity) may improve by virtue of fall in outstanding shares and assets (in this scenario, excess cash.

4. Now key question arises is that how to benefit from announcement of buy back and a simple answer to that is that if one has a faith in the stock than one should straight away buy the stock as a buy back is a proof that company is doing well and hopes to keep on doing well and thus one is bound to get good returns.

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