Let’s take Apple for example. They just announced they will be buying 110 billion USD worth of their own stock back. Is this a good thing for a company? Lets say if I owned stocks in Apple, I'm curious how this would pan out for either party.
I want to understand this from the perspective of shareholders. There is a lot of info out there talking about stock buybacks from the company’s stand point.
To add to that, you will barely notice it most of the time when a company buys its own stock back. Often, the price doesn’t go up. Even 110 billion worth of shares doesn’t guarantee price will go up.
Here’s how,
Lets say a company worth 1 billion USD has 10m shares in the open market worth 100$ each. If the company spends 100M to buyback its shares, its market cap goes down by 100M. So now you have a 900m USD company with 9M shares in the market.
thanks for explaining so well. So it looks like a good thing for me. But what about apple? Is this a good move for them?
Traditional rule of thumb says it’s a good move for Apple. In theory, a company only buys back its own shares when it believe its stock is undervalued on the market. So, in theory, Apple is buying back its own shares because they think the price will be higher later and they can reissue (and sell) them at a hire price.
Ah, I see. They have new launches lined up in 2024 so it makes sense now but felt counter-intuitive at first. I guess it's a good time to buy more
If anything, this won’t be changing much for you. buying its shares on the open market reduces its outstanding shares. This may eventually raise the prices of the remaining shares. Let me also clarify that this is not Apple reaching out to you to buy their shares back, but you will notice a rise in the stock price.
In this scenario, you can sell your shares to Apple or other investors willing to buy. Another option is obviously you can hold them.