A stock buyback is when a company uses its cash to buy back its own shares from the market, shrinking the share count so each remaining share owns a bigger slice of the business.
A stock buyback (or share repurchase) is when a company spends its own cash to purchase its shares on the open market and retire them. With fewer shares outstanding, every remaining share — including yours — represents a slightly larger ownership stake in the same company. It's one of the two main ways a company returns cash to shareholders, the other being dividends.
The math is the key. If a company earns $100 million and has 100 million shares, its EPS is $1.00. Buy back 10 million shares and the same $100 million is now spread over 90 million shares — EPS rises to about $1.11 with no change in the actual business. A higher EPS can lift the stock even when profits are flat, and it lowers the P/E ratio.
A dividend pays you cash directly; a buyback rewards you indirectly by raising the value of each share. Critics argue buybacks can be poorly timed (companies often buy high), can be used to inflate EPS and executive bonuses, and may come at the expense of investing in the business. Done at the right price, though, they're a genuine return of capital.
See ownership math in action: a buyback is really about owning a bigger slice. Build and grow a real position in the stock market simulator with $10,000 of play money.
Not advice: educational content only. For authoritative basics see the SEC at investor.gov.
Related: what are dividends, the P/E ratio, and fundamental analysis.
A stock buyback is when a company uses its cash to buy back its own shares and retire them, leaving fewer shares so each remaining one owns a bigger slice of the business.
Earnings are divided by the share count. By reducing the number of shares, the same total profit is spread across fewer shares, so earnings per share goes up even if profit is unchanged.
A dividend pays shareholders cash directly, while a buyback rewards them indirectly by shrinking the share count and raising each share's value. Buybacks are also more flexible and can be paused.
It depends on price. Buybacks done when shares are cheap genuinely return value, but poorly timed buybacks at high prices, or ones used mainly to inflate EPS and bonuses, are widely criticized.