Stock buyback
Also known as: share repurchase, share buyback
A stock buyback is a corporation's repurchase of its own outstanding shares, either through open-market purchases or a tender offer. Buybacks reduce shares outstanding, which tends to increase earnings per share and return capital to shareholders.
A stock buyback, or share repurchase, occurs when a corporation buys back its own shares from investors. Companies typically repurchase shares gradually through open-market purchases, but they can also make a self-tender offer — a public offer to buy a set number of shares from existing shareholders, usually at a premium to the market price, within a limited window.
Repurchased shares become treasury stock: they no longer vote, no longer receive dividends, and are excluded from shares outstanding. The mechanics matter for the numbers. If a company earning $10 million has 10 million shares outstanding, EPS is $1.00; after buying back 1 million shares, the same earnings spread over 9 million shares lifts EPS to about $1.11 — with no change in the underlying business.
Companies buy back stock to return excess cash to shareholders (a tax-flexible alternative to dividends, since shareholders realize gains only when they sell), to signal management's belief the stock is undervalued, to offset dilution from employee stock compensation, or to defend against a takeover by shrinking the public float.
The SIE exam covers buybacks alongside tender offers as corporate actions. Test-takers should know how buybacks differ from tender offers, what happens to repurchased (treasury) shares, and why reducing shares outstanding raises earnings per share.
Key takeaways
- A buyback is a company repurchasing its own shares, via open-market purchases or a self-tender offer.
- Repurchased shares become treasury stock — they carry no votes and receive no dividends.
- Reducing shares outstanding increases earnings per share even if total earnings are unchanged.
- Buybacks return capital to shareholders, signal perceived undervaluation, and offset dilution from stock compensation.
- The SIE exam tests buybacks as a corporate action alongside tender offers.