Financial Dictionary -> Investing -> Buyback

Buyback is a stock related term that refers to the buying back of stocks or bonds by the issuing company, therefore reducing the amount of shares in the market place and increasing the percentage of ownership that all the other shareholders have, as the total amount has been reduced. Think of it as dividing the pie between less people.

A company may do this when they feel financially solid and do not need to raise any more finance through shares, or when they feel share price is undervalued. By removing shares from the market place it raises their value because of the lack of availability rule. Other reasons may be to regain more control of the business (the more shareholders the less power a company has), or to put shares and stock options aside for employees as part of their contracts or as bonuses.

There are other less used terms for Buyback, including the process of making a long term investment, to balance out a failing short term investment. Think of this as "buying back" your financial position in the long run. An example of this might be that a company you held shares in went bankrupt, costing you $20,000, so you buy a house and rent it out, making back that $20,000 in the long run.

Buyback may also refer to the process by which a seller of an item (usually financial securities) agrees to buy them back at a certain price at a certain time in the future. This is comparable to the pawn shop system, where those in need of immediate cash can sell items to the store and buy them back later. If they don't come back within the period given the store sells the items for a higher price.