Identification

• Share buybacks reduce the number of shares outstanding for a particular corporation. The corporation uses available cash, or takes out loans to finance the purchases in the open market. Outstanding shares bought back by the company are referred to as treasury stock.
  
  

Features

• Net income is the primary catalyst behind share price performance. The corporation buys back stock to increase the amount of earnings that are available for each share. Increasing earnings per share statistics translate into higher share prices.
  
  

Considerations

• Corporations compensate executives with stock options, which increase the amount of shares outstanding. Additional shares outstanding dilute, or reduce, earnings per share. The company may consider share buybacks to neutralize earnings dilution.
  
  

Misconceptions

• Share buybacks do not always increase earnings per share and stock prices. Remember: The company is still spending money to buy stock, which decreases net income.
  
  

Risks

• Share buybacks are ineffective when company stock is bought at expensive levels. Shares may then lose value, and the money would have been better spent on dividend payments or equipment.