<p>A buyback, also known as a share repurchase, occurs when a company uses its cash to buy its own outstanding shares from the open market or directly from shareholders. By reducing the number of shares in circulation, the firm can increase earnings per share, signal confidence in its valuation, and return capital to investors without paying a <a href="/NewSite/encyclopedia/dividend/" class="ency-link">dividend</a>.</p>

<h2>How It Works</h2>
<p>The board of directors authorizes a buyback program, specifying the maximum amount of money or number of shares to be repurchased over a set period. The company then executes the repurchase through one of several methods:</p>
<ul>
<li><strong>Open‑market purchases</strong>: Shares are bought gradually on the exchange, just like any other investor.</li>
<li><strong>Fixed‑price tender offer</strong>: The firm offers to buy shares at a predetermined price, usually above the current market price, for a limited time.</li>
<li><strong>Dutch auction</strong>: Shareholders state the price at which they are willing to sell; the company accepts the lowest price that allows it to acquire the desired quantity.</li>
</ul>
<p>Repurchased shares may be retired, permanently reducing the share count, or held as treasury stock for future reissuance, employee compensation, or potential resale.</p>

<h2>Why It Matters</h2>
<p>Buybacks affect both the company’s financial metrics and shareholder value. By lowering the share denominator, earnings per share (EPS) often rise, which can make the stock more attractive to investors. A buyback also signals that management believes the shares are undervalued, which can bolster market confidence. For example, if a company with $1 billion in cash repurchases 10 million shares at $100 each, the share count drops, EPS increases, and remaining shareholders own a larger proportion of the firm without any additional investment.</p>
<p>Unlike dividends, buybacks are flexible; a firm can pause or accelerate repurchases based on cash flow and market conditions. However, critics argue that excessive buybacks may divert funds from productive investments or debt reduction. Understanding the mechanics and motivations behind buybacks helps investors assess whether a company is returning capital prudently or merely attempting to inflate its stock price.</p>