Why does a company propose to buy its own stock?

[palefrost]

My friend got a notice from the broker that the company he bought stock in is proposing to buy up to 73,000 shares of its common stock at a price not greater than $37.00 nor less than $32.00 per share. The present price is about $35.66. he owns only a little over 100 shares of it and i was wondering whether he should go for this or not.

Ive never heard of such a offer before, why do companies do this? I presume it is not to their own disadvantage. Is it because they figure the price is going to go up and then they can sell at a profit, or what?

 

[Brandon]

A company buying its own stock is called a 'stock buyback'. The reasons why a company might buyback its own shares are:

1. Management thinks the stock will go higher and is investing in itself.
2. The company has future plans of going private.
3. The company wants to give shareholders more value per each share.

Buybacks are great whichever way you look at it. If they do it for reason 1 then it is good to keep the shares since the company hopes to earn more in the future. Reason 2 and 3 are good in the short term. The shares might go up solely because the amount of shares in the pool has decreased. If the company goes private then you will not have your stock anymore and reason 3 is just a quick way to increase value with minimial work. Reason 1 is the best option by far.