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buybackshares by companies

Discussion in 'Fundamental Analysis' started by mahipalreddy28, May 14, 2012.

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should we believe in buyback of shares

Poll closed May 17, 2012.

  1. yes

    1 vote(s)
    50.0%

  2. no

    1 vote(s)
    50.0%
  1. mahipalreddy28

    mahipalreddy28 New Member

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    now a days company managements are misleading investors by announcing buyback shares.Actually they are not in a position to buy the shares .for eg RIL AND UNITEDPHOSPORUS.this co is paying high interest on his debts and howthey will buyback shares.kindly discuss this subject in forum
     
    mahipalreddy28, May 14, 2012
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  2. shabbir

    shabbir Administrator Staff Member

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    Hi Mahipal,

    There are lot of things involved in buyback and so let me first clarify them so it helps you as well as other fellow members when it comes to understanding Buy backs.

    Buy Back of shares is for companies that have excess liquidity and companies think that instead of investing the extra money into something else they see more value in the companies shares at the current market price and so they announce buy back.

    How buy back works?

    Normally companies announce a buy back based on cash levels and stock price levels which means a company has a cash of say 1 crore and their shares trade at 80 Rs when they plan to announce the buy back and so they would announce the buy back for say 1 Crore with a maximum price per share of 100 Rs i.e. 20 Rs premium to the current market price.

    What does buy back means to investors?

    Ideally when buy back is announced it is announced at some premium and so ideally promoters can start purchasing the stock at any price lower than the announced price.

    What it means to the retail investor?

    We follow news and jump into buying the stock assuming it will be bought by promoters at the price announce but actually that is the maximum price at which promoters would buy but does not mean it would be purchased at that price.

    What else we miss in buy back announcement?

    Most of the time I see that people miss when the buyback will be effective and normally it is couple of months after it is being announced.
     
    shabbir, May 14, 2012
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  3. shabbir

    shabbir Administrator Staff Member

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    Now coming to your question about the stock if we look into the above scenarios RIL is one of the stock that I follow and has pile of cash to do the buy back and so if we know the price and the time of buy back we may benefit from it.

    Apart from that we should also know what percentage of the company is in public domain and what percecntage is being bought back and so that may decide if there is any arbitrage in the stock at the price we buy.
     
    shabbir, May 14, 2012
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  4. shabbir

    shabbir Administrator Staff Member

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    BTW the above post was the 100th post of the forum in a very short span of time.
     
    shabbir, May 14, 2012
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