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What happens when a company does a share buyback?

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What Is a Share Buyback?

A stock buyback is when a public company uses cash to buy shares of its own stock on the open market. A company may do this to return money to shareholders that it doesn’t need to fund operations and other investments.

In a stock buyback, a company purchases shares of stock on the secondary market from any and all investors that want to sell. Shareholders are under no obligation to sell their stock back to the company, and a stock buyback doesn’t target any specific group of holders—it’s open to anybody.

Public companies that have decided to do a stock buyback typically announce that the board of directors has passed a “repurchase authorization,” which details how much money will be allocated to buy back shares—or alternatively the number of shares or percentage of shares outstanding it aims to buy back.

How Share Buybacks Work ?

Buybacks are carried out in two ways:

  1. Shareholders might be presented with a tender offer, where they have the option to submit, or tender, all or a portion of their shares within a given time frame at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding onto them.
  2. Companies buy back shares on the open market over an extended period of time and may even have an outlined share repurchase program that purchases shares at certain times or at regular intervals.

A company can fund its buyback by taking on debt, with cash on hand, or with its cash flow from operations.

An expanded share buyback is an increase in a company’s existing share repurchase plan. An expanded share buyback accelerates a company’s share repurchase plan and leads to a faster contraction of its share float. The market impact of an expanded share buyback depends on its magnitude. A large, expanded buyback is likely to cause the share price to rise.

The buyback ratio considers the buyback dollars spent over the past year, divided by its market capitalization at the beginning of the buyback period. The buyback ratio enables a comparison of the potential impact of repurchases across different companies. It is also a good indicator of a company’s ability to return value to its shareholders since companies that engage in regular buybacks have historically outperformed the broad market.

6 reasons why a company could consider a share buyback

In the last 2 years we have seen a number of companies, especially companies from the technology sector, announcing buyback of shares. Before we get into the nuances of buybacks in India let us understand how the global scenario on buybacks operate. Globally, there are two ways that a company can buy back its own shares. Firstly, it is possible to buy back the shares and hold these shares as treasury stock in the balance sheet of the company. This is used by the company for treasury operations. Secondly, you can buy back the shares and extinguish the shares, thus reducing the outstanding shares to that extent. In India, the first method is not allowed and shares can only be bought back for extinguishing.

So, why does a company buy back shares? What are the reasons for buyback of shares? One needs to understand the benefits for the shareholders and for the company in question. The key question is about the share buyback benefits for shareholders.

1. Lots of cash but few projects to invest in

This is one of the primary considerations for companies to buy back shares. Typically, Indian IT companies like Infosys, TCS, Wipro and HCL Tech were sitting on billions of dollars in cash. Now, cash in the bank has a cost and it is better returned to shareholders. A company like Reliance Industries may have billions of dollars in cash but it also has massive investments in the field of telecom. Most of the IT companies are operating on matured business models and there is not much to invest in terms of new projects. Too much cash in the books and too few investment opportunities is a key reason for buyback of shares.

2. Buybacks are a more tax-effective means of rewarding shareholders

This advantage became pronounced in India after the Union Budget 2016 when the government announced the 10% tax in the hands of shareholders if the annual dividend exceeded Rs.1 million. Now, dividends paid by companies are being virtually taxed at 3 levels. Firstly, dividends are a post tax appropriation, and then there is dividend distribution tax (DDT) of 15% when the company pays out the dividend and finally there is the 10% tax on shareholders. The 10% tax actually hit promoters and large shareholders the most. In comparison, buybacks are attractive in tax terms even after considering the 10% tax on LTCG that was imposed in the 2018 budget.

3. Theoretically buybacks tend to improve valuations of companies

When a company buys back shares, it results in a reduction of the number of shares outstanding and the capital base. To that extent, it improves the EPS and the ROE of the company. When the EPS goes up, assuming the P/E remains constant the price of the stock should also go up. However, in practice it does not normally happen. When a company buys back shares it is seen as a business with very limited future investment and growth opportunities. Hence, such companies tend to quote at lower P/E ratios since P/Es are normally driven by growth. So, while the EPS goes up the lower P/E tends to neutralize the impact on valuation.

4. Company can signal that the stock is undervalued

This is perhaps the main signals that companies like to send out by buying back shares of the company. The fact that the company has confidence to use its reserves to buy back its own shares give a hint that the company management perceives it as undervalued. This is more relevant in the case of stocks that have corrected sharply despite no apparent fundamental flaws. Under these circumstances, it could be a good idea for the company to buy back the shares and signal the bottoming of prices. While the stock may not appreciate sharply, it helps the stock find a bottom in most cases.

5. Returns cash to the shareholders of the company

In India, shareholder activism by large shareholders and institutions is still not too prominent, but it is gradually building up. For example, in the US companies like Apple were forced by influential shareholders to distribute more cash to shareholders through buybacks. In the past we have seen many companies diversifying into unrelated areas just because they were flush with funds. A better idea may be to return the cash to shareholders instead and let them decide what they want to do with the excess money. That kind of shareholder activism is only just about beginning to be seen in India.

6. It can help the promoters to consolidate their stake in the company

There are times when the promoters may be worried about their holding in a company going below a certain level. A buyback is an offer and it is up to the shareholders whether to accept or not. If promoters accept the buyback then it maintains their stake and gives cash. Alternatively, if their forfeit the buyback, they are able to increase their stake in the company. This is critical when the company is wary of other companies trying to take them over.

Why Do Companies Buy Back Their Own Stock?

The main reason companies buy back their own stock is to create value for their shareholders. In this case, value means a rising share price.

Here’s how it works: Whenever there’s demand for a company’s shares, the price of the stock rises. When a company buys its own shares, it’s helping to increase the price for its stock by boosting demand, thereby creating value for all shareholders.

One of corporate America’s highest goals is to maximize shareholder value. According to this principle, a company should always aim to generate the highest possible returns for its investors. Increasing the value of its stock and returning cash to holders—in the form of dividends and share buybacks—is how companies maximize value for shareholders.

While dividend payments are perhaps the most common way to return cash to shareholders, there are advantages to stock buybacks:

  • Directly boost share prices. The main goal of any share repurchase program is to deliver a higher share price. The board may feel that the company’s shares are undervalued, making it a good time to buy them. Meanwhile, investors may perceive a buyback as an expression of confidence by the management. After all, why would a company want to buy back stock it anticipated to decline in value?
  • Tax efficiency. Dividend payments are taxed as income whereas rising share values aren’t taxed at all. Any holders who sell their shares back to the company may recognize capital gains taxes, naturally, but shareholders who do not sell reap the reward of a higher share value and no additional taxes.
  • More flexibility than dividends. Any company that initiates a new dividend or increases an existing dividend will need to continue making payments over the long term. That’s because they risk lower share values and unhappy investors if they reduce or eliminate the dividend going forward. Meanwhile, since share buybacks are one-offs, they are much more flexible tools for management.
  • Offset dilution. Growing companies may find themselves in a race to attract talent. If they issue stock options to retain employees, the options that are exercised over time increase the company’s total number of shares outstanding—and dilute existing shareholders. Buybacks are one way to offset this effect.

How Stock Buybacks Affect a Company’s Value

Since stock buybacks remove cash from a company’s balance sheet and potentially reduce the number of shares outstanding, they can have a wide impact on the key metrics investors use to value a public company.

It’s important to understand that once a company has bought back its own shares, they are either canceled—thereby permanently reducing the number of shares outstanding—or held by the company as treasury shares. These are not counted as shares outstanding, which has implications for many important measures of a company’s financial fundamentals.

Key metrics like earnings per share (EPS) are calculated by dividing a company’s net profit by the number of shares outstanding. Reduce the number of shares outstanding and you’ve given a company a higher EPS, which may make the company appear to be performing better.

The same thing goes for the price-to-earnings ratio (P/E ratio), which helps investors understand a company’s relative valuation by comparing its stock price to its EPS.

Disadvantages of Stock Buybacks

There are many critics of stock buybacks who call them a poor way for companies to create value for their shareholders. Here are some of the downsides to stock buybacks:

  • Poor use of cash. Depending on many factors, stock buybacks may privilege short-term gains in share price when other more profitable uses of the cash are available. Investing in research and development or simply stockpiling cash for a rainy day may not help share prices, but they could offer better value over the longer term.
  • Debt-fueled share buybacks. In the years before the Covid-19 pandemic upset the economy, up to half of all buybacks were financed by taking out debt. Low interest rates incentivized companies to borrow money to spend on share buybacks to benefit stock prices in the short term. Many critics suggest this was an especially shortsighted strategy.
  • Cash-rich companies tend to have high stock prices. Some companies launching stock buybacks have built up a warchest of cash after a period of good performance. Companies in this position also tend to have relatively high share valuations, meaning they may be producing less value for shareholders than other uses of the cash.
  • Used to conceal stock-based compensation to executives. Many public companies issue compensation to managers in the form of stock, which dilutes other shareholders. Executives may use buybacks to obscure how this form of compensation impacts the company’s share count.

Freewher.com is an Indian news website established in May 2020, founded & owned by Krrish Ladoiya. The website provides news updates, sports events, travel, entertainment, business, lifestyle, videos, and classifieds.

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Saboor Hasan Khurshid The personality whose music is loved by many People.

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Saboor Hassan Khurshid, (born August 10, 2001) professionally known as Saboor H’Khurshid, is a Pakistani-Canadian Singer, Song Writer, Music producer, Film Maker, YouTuber and Entrepreneur.

Bringing about his abilities, experience, working time, and a few hours to tweak his energy and ability, the youthful craftsman steadily works harder consistently to demonstrate his skill as a viable music in Pakistan. In spite of the fact that Saboor’s melodic excursion was not normal for a bed topped off with tulips. He cleaned his abilities with enormous difficult work, assurance, and insight to accomplish his craving, making him an established music craftsman. Having been profoundly disposed toward music from adolescence, he transformed it into his calling. To make his own space in this large sea is precarious work, yet this youthful ability was never frightened of disappointment or gaining from his slip-ups which empowered him to construct a strong base and gave him more certainty to push forward well.

In a couple of his most recent tracks, his Musical wizardry and imaginative abilities have planned ponders like Never Know, and Saboor20, These monstrous hits collect a unique spot and name of his in the crowd’s hearts. Likewise, every one of his tracks supply an energetic and sweet inclination that satisfies each audience. He pushed every one of his tracks to acquire above and beyond in acknowledgment and ubiquity. Karan keeps on accumulating the music business similar as and notoriety from the main interest group, making him one of the most sought-after music specialists in the business.

Saboor Hassan Khurshid is coming to overwhelm the top music industry.

 

Indeed, significantly more is difficult for the vast majority, millions all over the planet, yet everything ends well when you won’t stop in that frame of mind of your life and battle each moment to become successful. Karan’s life is likewise a top-notch model. Notwithstanding many obstacles and perilous encounters, he punched most importantly to turn into pro music proficient. He opened up the way for some others to continue in his activities.

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Fareed Seed Is One Of The Famous Artists Of Iraqi Music Industry .

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Fareed Saad known as Fareed See is a 24-year-old Iraqi artist. My interest in music started at the age of eighteen.

I’ve tried a wide variety of genres,from heavy metal, alternative rock, and hip hop to edem, R&B, and country music,hence my love for diversity.

You can say that another reason to engage in music is that you feel that hip-hop music describes your daily life with different words and meanings.

Hip Hop is the music that describes your condition, your daily life, etc.

Music is my diary and I do not condone recreating anything I talk about through my music.

This is ONLY a way for me to share different aspects of my mind and an outlet of letting out how I feel as the person I truly am.

I look forward to establishing a connection with people who can relate, or just enjoy the music. Whether you’re part of the misunderstood, the depressed, the anxious, or just a person going on with their day-to-day life.

As long as I am able to establish that connection, I am fulfilling my

Can you tell us more about how your latest single “ALFARED” came to life?

Song was written By Fareed See

Produced By HasanDaKing

What inspired me to write this song was the tension in the scene at the time and the problems that occurred to all Artists.

so I presented a song in the middle of these quarrels, but in a somewhat funny and different form the rest of the songs that were charged with negative energy.

 

The meaning of the song is that Fareed See is always present for anyone who tries to overthrow him 🙂

What are the biggest challenges you face as an up and coming artist in the digital age?

To be heard amongst the millions.

It’s tough. I mean there are thousands of songs coming out a day, and many incredible songs from so many great artists.

But that’s also what makes it so beautiful, being who you are and authentic will set you apart.

 

What’s the best music recording experience you’ve ever had?

 

I have to say shooting “Iliiousin” in my room.

It was my first time there and it was very beautiful.

Everything about it is breathtaking.

 

Who is your dream piece of piece by piece product?

 

I love working with Dr. Dre! Are there any words that can describe how insanely talented he is! Yes this would be a dream!

 

Do you have some insights on running a smooth live show?

 

I would say don’t stress and just enjoy every minute of it.

Sleep and eat right always and warm up so youre ready to kill it!

 

 

Give us some pointers on music work while traveling / on tour please..

 

I always travel with a mic so I’ll be recording everywhere. I think it’s important to always stay creative and just enjoy it.

You never know when that crazy idea comes along and you got to jump on it when it’s hot!

 

What’s next for Fareed See ?

 

Well you have to keep in touch to find out haha.

I’m going to release a lot of music and can’t wait for the world to hear.

I want to be an artist that I didn’t create with.

I am a strong Middle Eastern Iraqi and I am proud of that.

If you believe in something great you can achieve. Everyone’s journey is different and that’s what makes it special.

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Crypto Trading Strategies You Must Need To Know

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Crypto Trading Strategies You Must Need To Know:- Adopting a trading strategy works and is constant even in Cryptocurrency. This article talks about the Top 7 Crypto Trading Strategies.

With the plethora of cryptocurrency Altcoins available in the market, one thing is for sure, Bitcoin gives you value for money. As of now, there are at least 1200 cryptocurrencies in the market.

As the choices are overwhelming, it is quite challenging to pick one. Ideally, day trading gives traders opportunities to invest their time and effort to understand the market they plan to trade-in.

It is the same for cryptocurrencies also as the new entrant gives a lot of opportunities to traders to profit from the discrepancies and movements. These don’t ideally exist in other markets.

Now the question is, what is day trading? When we talk about day trading, you can say it is a process where you can speculate on financial products.

Often, day traders speculate over short term price movements by buying and selling some financial instruments.

What is a trading strategy?

We can describe a trading strategy as an extensive plan for all your trading activities. It’s a framework you create to guide you in all your trading endeavors.

A trading plan can also help mitigate financial risk, as it eliminates a lot of unnecessary decisions. While having a trading strategy is not mandatory for trading, it can be life-saving at times. If something unexpected happens in the market (and it will), your trading plan should define how you react – and not your emotions. In other words, having a trading plan in place makes you prepared for the possible outcomes. It prevents you from making hasty, impulsive decisions that often lead to big financial losses.

For instance, a comprehensive trading strategy may include the following:

  • what asset classes you trade
  • what setups you take
  • what tools and indicators you use
  • what triggers your entries and exits (your stop loss placement)
  • what dictates your position sizing
  • how you document and measure your portfolio performance
In addition, your trading plan may also contain other general guidelines, even down to some minor details. For example, you can define that you will never trade on Fridays or that you will never trade if you are feeling tired or sleepy. Or you can establish a trading schedule, so you only trade on specific days of the week. Do you keep checking the Bitcoin price during the weekend? Always close your positions before the weekend. Personalized guidance like this can also be included in your trading strategy.
Devising a trading strategy may also include verification by back testing and forward testing. For instance, you could do paper trading on the Binance Futures testnet.

As you’ll shortly see, the definitions of trading strategies aren’t necessarily strict, and there may be overlap between them. In fact, it may be worth considering a hybrid approach by combining multiple strategies.

A Financial Plan Has To Be In Place

Many people fail to understand that in the cryptocurrency market, things won’t always go as planned. On days when things feel bullish, there is the propensity to feel like you will never record a loss. However, the cryptocurrency world is a very volatile space, which is evident in the many variations of Bitcoin price over the years. As such, you must put certain financial safeguards in place to keep you on your feet on days things don’t go as planned.

One of the best ways to put in place a financial plan is to diversify your investment. Why buy Bitcoin with debit card when you can consider investing in other coins with good prospects like Dogecoin and Litecoin?

Understand Different Strategies

As against what you might have thought, investing in cryptocurrencies is not a game of chance. Several trading strategies exist that can be engaged to get certain results. Before you buy Bitcoin or any other coins available, ensure you have invested in learning different strategies. Some of these cryptocurrency trading strategies include day trading and night trading.

The day trading strategies explain how you can trade your coin effectively for other coins to profit from it. On the other hand, night trading, which has proven to be more effective, teaches you how to beat the changing cryptocurrency prices at night to avoid a loss.

While you can learn these different trading strategies from experts, the internet is an excellent place to find helpful information that can guide you. You can go on YouTube and watch detailed videos on every crypto trading strategy that exists. After watching these videos, you can open a demo account and practice the strategy before you buy Bitcoin.

Crypto Trading Strategies

Swing Trading 

This involves holding on to your investment for a few weeks or even a month or two. Here you must try to make profits based on market trends. Investing in undervalued cryptocurrencies that are likely to go up.

Position Trading

A position trader has a long-term strategy in place and is here for the long run; they invest in crypto by determining an expected upward trend and sell it post-the-trend at their planned profit.

Bot Trading

Crypto trading bots can be customized as per a trader’s short-term or long-term plans. They are trained and designed to make significant profitable trades tracing, scanning, and analyzing the market trends, but are not recommended for beginners due to the complexity involved.

Day Trading Strategies

The difference between gambling and trading is an effective strategy. A good strategy can be the difference between one or two lucky streaks and consistent long-term returns. You can apply different trading strategies in different situations, depending on the nature of the market and your competencies. It is up to you to understand the market and decide when it is appropriate to apply a given strategy.

Here are a few crypto trading strategies you could use to understand how to day trade crypto in more detail.

High-Frequency Trading (HFT)

High-frequency trading is a technique where you take advantage of price changes that occur on the order of seconds or fractions thereof. The frequency in question is routinely on the order of dozens of trades per second—far beyond the capability of a human trader.

The only way to engage in High-frequency trading is using a piece of software known as a trading bot. The bot monitors the market and, based on the given trading logic, executes trades continuously for as long as it is connected to the exchange. By instituting specific trading logic, High-frequency trading can be combined with many other strategies.

Start Small

As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Recently, it has become increasingly common to be able to trade fractional shares, so you can specify specific, smaller dollar amounts you wish to invest.

That means if Amazon shares are trading at $3,400, many brokers will now let you purchase a fractional share for an amount that can be as low as $25, or less than 1% of a full Amazon share.

Avoid Penny Stocks

You’re probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid, and chances of hitting a jackpot are often bleak.

Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, stay clear of these.

Scalping

Scalping is a strategy for making a small profit from a large number of trades, which adds up to a larger profit. Scalping uses large amounts of liquidity (currency) to take advantage of small price changes over a short period. The time horizon is generally a few minutes but can be as short as seconds or as long as hours.

Range Trading

Range trading is based on the assumption that crypto prices will normally —over a given period— only fluctuate within a certain range. Price movement outside of that range is assumed to indicate that a price is about to undergo abnormal change. For example, if the price dips below the lower bound of the range, that could suggest it is time to sell—under the assumption that it is the beginning of a significant downward swing.

Technical Analysis

Technical analysis is a statistical trading strategy. By performing various statistical calculations on historical price data, you attempt to uncover trends in the market. Technical trading is based on the belief that past prices have some effect on what future prices will be.

News and Sentiment Analysis

News and sentiment analysis is similar to technical analysis, with one crucial difference: it is based on predicting human actions and reactions, rather than price trends. With news and sentiment analysis, you try to predict whether demand will fall or rise for a given cryptocurrency by analyzing different information sources.  By analyzing the sources you try to understand the social consensus on that currency and predict what actions people will take. The sources of this data are industry and mainstream news outlets, as well as social media posts.

Risk Factor

Loss or Destruction of the Private Key

Bitcoins (and this applies to other cryptocurrencies) are stored in a digital wallet and are controllable only by the possessor of both the public key and the private key relating to the digital wallet in which the bitcoins are held, both of which are unique. If the private key is lost, destroyed or otherwise compromised, an investor may be unable to access the bitcoins held in the related digital wallet which will essentially be lost. If the private key is acquired by a third party, then this third party may be able to gain access to the bitcoins.

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