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Why Companies Buy Back Shares

There are a few reasons a company might choose to buy back its own stock. It might believe its shares are undervalued by the market – and that its return on capital from buying them will be better than if it used the same money to buy machinery to build and sell more products, for example. Additionally, stock buybacks usually create more demand for a company’s shares, since there are fewer of them available to buy – and can indicate that a company’s pretty confident in its future growth prospects (it probably wouldn’t buy its shares if it didn’t believe their value would rise in the future). So, to most investors, buybacks are a positive signal – and share prices of companies that announce buybacks usually rise. A more cynical interpretation, however, is that companies buy back shares in order to prop up their share price after bad news (by itself creating more demand for its stock as discussed).

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