Buy Backs

Just as it can issue additional shares, a company can repurchase, or buy back, shares of its stock. When a company repurchases shares, it takes them out of the secondary market and thereby increases each shareholder's relative stake in the company.

While there are many motivations for a company to buy back shares, a common reason is to increase the price of its stock. Decreasing the number of shares available for purchase may make the stock more attractive, elevating demand and eventually the stock price. In addition, a company may wish to reduce dilution that results from granting stock options to employees.

Because companies use their own money to repurchase shares, a buy back reflects a company's belief that a repurchase is a better use of its cash than investing in another company, reinvesting in its own business, or paying a dividend. Companies can buy back gradually in the stock market or through a tender offer, in which shareholders have the right to sell their shares at a given price.