Risk trap or clever maneuver: Why investors should know about share buybacks

Risk trap or clever maneuver: Why investors should know about share buybacks

According to a report from www.focus.de

Stock buybacks are a common practice in which companies buy back their own shares to return money to investors. Last year, global spending on stock buybacks was $1.661 trillion, almost double that of 2020. This practice is viewed critically by many investors as it can potentially impact the company's long-term competitiveness.

Stock buybacks have dubious effects, ranging from increased earnings per share to a possible management conflict of interest. It is important to analyze the impact on the market and shareholders when companies consider this practice.

The criticism of share buybacks refers to the lack of ideas in management that arises from the destruction of own shares in favor of short-term profit increases. The mechanics of share buybacks cause earnings per share to artificially increase, which improves the stock's price-to-earnings ratio and benefits shareholders and management.

Reducing free float through share buybacks undermines shareholder democracy and gives management more control over corporate decisions. This practice can also be used to manipulate price movements and influence the natural mechanism of the stock market.

On the positive side, share buybacks can help prevent stock dilution and increase investor confidence. It is important that companies ensure that they are not acting at the expense of long-term investments when considering share buybacks.

Overall, share buybacks are a complex practice with advantages and disadvantages that companies and investors must carefully weigh. It is critical that companies keep their responsibilities to investors and society in mind when considering the use of share buybacks.