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Tag: share price

  • What Is A Stock Buyback And How Does It Affect A Stock’s Price

    Over the last few years, a number of companies have said they will buy back their own shares. Before we get into the details of buybacks in India, let’s look at how they work around the world. There are two ways for a company to buy back its own shares around the world. First, you can buy back the shares and keep them as “treasury stock” on the company’s balance sheet. The company uses this for treasury operations. Second, you can buy back the shares and get rid of them, which will reduce the number of shares that are still outstanding by that amount. In India, the first way isn’t allowed. Instead, shares can only be brought back to get rid of them.

    So, why do companies buy back their own shares? Why does a company buy back its own shares? One needs to know what the benefits are for the company and the shareholders. The most important question is what shareholders can get out of buying back their own shares.

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    1. Have a lot of money but not many projects to invest in

    This is one of the main reasons why companies want to buy back their own shares. Indian IT companies like Infosys, TCS, Wipro, and HCL Tech had billions of dollars in cash on hand most of the time. Now, keeping money in the bank costs money, so it’s better to give it back to shareholders. A company like Reliance Industries may have billions of dollars in cash, but it also has huge investments in the telecom industry. Most IT companies use business models that have been around for a while, and there aren’t a lot of new projects to work on. One of the main reasons for buying back shares is that there is too much cash on the books and not enough investment opportunities.

    2. Buybacks are a better way to reward shareholders because they save on taxes

    This advantage became clearer in India after the 2016 Union Budget, when the government said that shareholders would have to pay a 10% tax if their annual dividends were more than Rs. 10 lakhs. Now, companies are taxed almost three times on the dividends they pay out. First, dividends are paid out after taxes have been taken out. Second, there is a dividend distribution tax (DDT) of 15% when the company pays out the dividend. Third, shareholders pay a 10% tax. Most of the 10 percent tax went to promoters and big shareholders. Even with the 10% tax on long-term capital gains that was added in the 2018 budget, buybacks are still a good tax deal.

    3. In theory, buybacks tend to raise the value of a company

    When a company buys back its own shares, the number of shares out in the market and the capital base go down. In this way, it makes the company’s EPS and ROE better. If the P/E stays the same, when the EPS goes up, the stock price should also go up. But in real life, it doesn’t happen very often. When a company buys back its own shares, it is seen as a business with few chances to grow and invest in the future. Since P/E ratios are usually based on growth, these companies tend to have lower P/E ratios. So, even though EPS goes up, the effect on valuation is usually about the same because P/E goes down.

    4. The company can send a message that the stock price is too low

    This may be the most important message that companies want to send when they buy back their own shares. The fact that the company is sure enough of itself to use its reserves to buy back its own shares suggests that the company’s leaders think it is undervalued. This is more important for stocks that have dropped sharply but don’t seem to have any major problems. In this situation, it might be a good idea for the company to buy back the shares to show that prices have hit rock bottom. Even though the stock may not rise sharply, it usually helps the stock find a bottom.

    6. It can help the company’s founders get a bigger share of the business

    There are times when the people who started a business may worry that their stake in it will fall below a certain level. A buyback is an offer, and it’s up to the shareholders to decide if they want to take it. If the promoters agree to the buyback, it keeps their stake in the business and gives them cash. On the other hand, if they don’t take the buyback, they can increase their stake in the company. This is very important if the company is afraid that another company will try to take it over.

    In India, the only way to buy back shares is to get rid of them. Even though the effect on stock prices is still up for debate, there is no doubt that buybacks are a tax-efficient way to give cash back to shareholders.

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  • Understanding Stock Splits And Its Impact On The Share Price


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    Every investor looks to the stock market for shares that will make him money. But sometimes investors can’t buy shares of a popular company. The reason is that the share price is so high. Companies decide to split their shares when this happens.

    Stock split, as the name suggests, is when the face value of a stock goes down and the number of outstanding shares goes up at the same time. The main goal of a stock split is to make the stock easier to buy and sell, so that investors can buy more of it. Companies do stock splits when they realise that the price of their shares is too high or is higher than the prices of their peers.

    For example, if a company does a 1:10 stock split, a stock with a face value of INR 1000 is split into 10 shares with a face value of INR 100. But keep in mind that the company’s share capital doesn’t change. This means that a stock split is nothing more than a cosmetic change, and that the news of a stock split won’t affect the price of the stock in a way that will lead to unusually high returns. Even if there is information in the announcement, it is most likely to show up as unusual returns on the day of the announcement, which is called the record date.

    There are some ideas about why companies split their stocks:
    Signaling: a stock split is a sign that the company will grow in the future. This is because real-world studies of stock splits in developed economies have shown that the day after the announcement of a stock split, returns are often unusual.

    Optimal trading range:

    On every stock market, stocks tend to trade in a certain range. As we’ve already said, stock splits are done to get the price of the stock back into the normal trading range. This lets more investors buy shares.

    According to this theory, the goal of bringing the stock price back to the usual trading range is to improve liquidity, which will lead to investors making more money.

    This is a way for small or ignored firms to get the attention of the market. This is done by a company that feels it has been undervalued in the market because market participants haven’t shown much interest. So, companies use stock splits to get more attention and make sure that more investors can get information about the company. This is more important for small businesses than for big businesses.

    What do investors get out of a stock split?

    In a stock split, the number of shares goes up, but the value of each share goes down. This makes it easier for new investors to get interested in the company’s stock and buy some. In other words, the number of shareholders could grow if more investors bought at lower prices.

    It looks like investors who bought the split share at a lower price may not benefit from the stock split. But if the share price goes up, it could be because of a stock split. This tells the market that the share price of the company has been going up before the split, so investors think that the growth will continue in the future.

    So, after a stock split, should you buy a share?
    Before 1999, SEBI only let INR 10 and INR 100 be used as face values. Today, the split ratio can be 2:1, 10:1, 5:1, or any other number.

    A few reports suggest that the trading range theory is wrong because most stock splits are announced for stocks that were already trading at low prices.

    So, market experts have seen that the price of a share after a stock split depends on how the market is doing and how well the company is doing. Before investing in a share after a stock split, make sure you keep the above two points in mind. There’s no need to say that the market will always have mixed feelings about stock splits. Also, one last thing: don’t confuse a bonus with a stock split. Bonus shares only change the company’s issued share capital. A stock split, on the other hand, changes the company’s authorised share capital.