Myles of Investments

Read about my successes and failures. Learn from my experiences and gain insight without losing any cash!!!

Lesson: Catching a Falling Knife
Lesson: Currency Exchange
Lesson: Mutual Fund
Lesson: Paid to Wait
Lesson: Pricing in a Downturn

This is where you’ll find find my Blog. I will comment on the latest news relating to investing, real estate, and the financial markets.

Buy a Share of Stock – Buyback a Share of Stock

What are you doing when you buy a share of stock publicly listed on one of many world exchanges? You are becoming a partial owner in a business, or one of many partners, if you will.

This is important to know, because there is a company behind the stock that you purchased with a value, and earnings. If you buy a share of stock from a company, and you don’t know what they do, it is like paying to be partners with someone you have never met. You would be hoping that you can get rich on something you know little or nothing about.

You are effectively an owner of that company, and should learn about what the company does, how it operates, and how it is using the money that it earns. This money is your money, and as a share holder you are entitled to your fraction of the earnings.

There are a few options for businesses, when deciding how to use excess revenues. Often they will either issue a dividend to return profits to owners, or they will fund growth initiatives for the company. The problem with issuing a dividend is that the owner must pay tax on this and so the amount shareholdres receive is reduced. The risk with funding growth strategies is that they may not fit with the companies core strengths or they may not succeed. But, what if the company itself could buy a share of stock?

They can!!! It’s called a share buyback program. Companies can buy a share of stock like you or I, but instead of the company holding it, they cancel it and take it out of circulation. Why would they do this? It is a no risk way of making the company owner’s (you) richer without paying personal taxes. Effectively, YOU own more of the company.

An example could illustrate: let’s say that there is a company that has 4 shares outstanding. This means there are 4 equal shareholders who each own 25% of the company. If the company uses profits to buy one of the shareholders out, by buying and canceling their stock, there is only 3 shareholders left, who would then own 33% of the company each! This is great for you, so when looking to buy a share of stock, look for companies who have share repurchase programs.