What is a stock buyback?

A stock buyback, also known as a share repurchase, occurs when a company purchases its own shares from the marketplace. This action can serve several purposes, including the intention to reduce the number of outstanding shares, thereby potentially increasing the value of remaining shares and enhancing earnings per share (EPS). By reducing the supply of shares available, a buyback can also signal to the market that the company believes its stock is undervalued, which can instill confidence in investors.

In contrast, issuing new stock to raise capital is aimed at expanding the company's equity base, which is not the same as a buyback. The sale of shares to reduce ownership implies that existing shareholders are selling their stakes, thus diminishing their ownership interest, which also differs from the goal of a buyback. Lastly, while a buyback can indirectly increase market capitalization due to a potential rise in share price, it is not a method itself for increasing market capitalization, as that involves the overall market value of a company derived from its outstanding shares.