Share repurchase (or stock buyback) is the re-acquisition by a company of its own stock. It represents a more flexible way (relative to dividends) of returning money to shareholders.
In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company’s outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
Under US corporate law there are five primary methods of stock repurchase: open market, private negotiations, repurchase ‘put’ rights and two variants of self-tender repurchase: a fixed price tender offer and a Dutch auction. More than 95% of the buyback programs worldwide are through an open-market method, whereby the company announces the buyback program, and then repurchases shares in the open market (stock exchange). In the late 20th and early 21st centuries, there was a sharp rise in the volume of share repurchases in the US: US$5 billion in 1980 rose to US$349 billion in 2005. Large share repurchases started later in Europe than in the US, but are nowadays a common practice around the world.
It is relatively easy for insiders to capture insider-trading like gains through the use of “open market repurchases”. Such transactions are legal and generally encouraged by regulators through safe-harbours against insider trading liability.
U.S. Securities and Exchange Commission (SEC) rule 10b-18 sets requirements for stock repurchase in the United States.
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