Once a company has floated, its shares become tradable on what is known as the 'secondary market' and their price is determined by market forces.
The company does not play an active role in the secondary market, apart from registering the new owners of shares as and when trades take place. But there is one situation in which it does affect the market and that is when it buys back its own shares.
A share buyback (or 'buy in' as it is sometimes known) means that the company uses its own funds to go into the open market and acquire its own shares. The shares are not retained by the company, but are cancelled. This means that the available dividend payment is spread between fewer shares, so the dividend per share is higher for the remaining shareholders.
There are two ways of looking at share buybacks:
Often the motivation for a share buyback is management frustration at what they see as an undervaluation of their company's shares.
In early 2000, the CEOs of companies in 'traditional' industries watched in horror as the price of their shares fell away, while the prices of internet shares rocketed. At the time, there were lots of suggestions in the press (inspired by the CEOs themselves) that these old world companies would buy back their 'undervalued' shares. In fact very few did.
More than one journalist has noted that when a company announces that it intends to buy back its own shares, it often leads to a hike in the share price, whether or not the company intends to follow through.
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