Understanding the stock market is not as easy, but you can make a better impression on the market with an idea of the right concepts and terms. The stock market can be quite volatile, meaning with the right guidance and knowledge, you can make lots of money, but make a few wrong decisions, and all that profit goes down the drain.
To make the most of your investments and shareholdings, you need to understand two concepts: share buyback and share equity.
Both of these concepts are quite common to hear in the industry; with proper understanding of them, you can make huge profits. This article further talks about both in detail, helping you make better decisions in the future.
In the business world, equity is basically everything. When you buy equity in a company, it means you are sharing that percentage of the company’s ownership. This will also mean that the same percentage of any profits the company makes will be yours, and the same goes with losses. In the stock market, it is the same thing. How much equity you buy, essentially means how many shares of a particular company you are investing in. if you have more shares in a company. That company’s stocks make a profit, you will get a better return and vice versa.
It means how much of the company you own. When buying stocks of a particular company, you are buying an equivalent but shared ownership. The stock market is where these stocks, also known as equity, are traded from one investor to the other. You must learn about equity before learning about buyback.
What is buyback?
While equity is an easy concept to understand, buybacks can be a bit more complicated. Buyback is essentially a method used to reward all shareholders who have invested or bought shares in the company. As the name suggests, the process mainly involves buying back the equity shares from the shareholders directly by the company.
The company publicly announces a particular offer in a corporate action event. Their main goal is to acquire all the most of the existing shares in a stipulated time. Buyback is also known as repurchase of shared. This policy gets set and regulated by two main authorities, the companies act and the SEBI. Each company pulling a stunt like this must follow all the policy rules set by these authorities. In the Companies Amendment Act, 1999, this concept was first introduced. Before that and the Companies Act, 1956 forbid companies from doing this in India.
Why would you want to buyback shares?
After learning about the buyback policy, amateur shareholders often wonder why a company would want to do that. They think that selling the shares is where the money is, and for a company to invest in their own shares might be foolish. However, the truth is quite the opposite. There are quite a few clever reasons why a company might want buyback their shares/. Here are some common reasons mentioned.
- Undervalued stock:
One of the most common instances, when a company might buyback shares, is when the company’s management feels like the shares are undervalued. As a result, the buyback is done at a higher price than the present market price, which lessens the supply, but improves the price and demand of the shares.
- Not many opportunities with cash:
Quite a few times you will find companies have an excess of cash. While normally this money is spent on other profitable endeavours, the market is not always filled with opportunities. This is when they buy back the shares to increase its market price and reward the shareholders for investing in their company.
- Exempt from tax:
Any investment in the stock market requires tax dividend from both the company as well as the investors. However, in the buyback, only the company has to pay the tax, while the capital gain tax for all investors is not necessary. This makes it a great way to reward the investors.
- Change in capital structure:
The capital structure of any company is their debt to equity ratio. However, every industry has a separate capital structure, in which some companies rely mostly on debt to run their business, other cannot use any more debt. Hence, as per a requirement, the company has to opt for buyback to get the best capital structure.
You should know these important things before you are a full-fledged part of the shareholder’s market. Understanding these concepts can really help you better your decisions and learn why the market works the way it does.
Let’s just say you look at Nifty IT and choose to invest in the best IT stock out there – when you are an investor, your goal would be to invest in the IT stock for the long term, and that can differ for the trader.
