Buy Back Shares

Buy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces and hence the market capitalisation as per below relation:

Market capitalisation = Market value * Number of shares outstanding

From a corporate point of view what could be a better investment than investing in its own shares. But why would a company invest in itself is what many of us will ponder about. Here is the answer!!

Firstly,
consider a company which possesses huge cash reserve but has no upcoming projects to invest into. In that case the company may plan to invest in itself and offer the existing shareholders an option to sell their shares to the company at an attractive price. It is similar to reinvesting its cash in itself which also aims at bringing in dilution in the markets as outstanding shares in the market are reduced.

Secondly,
a company may also go for buybacks with an aim of projecting better valuation of their stocks when they think it is undervalued in the market. The reason is companies buy its shares at higher price than current market price which indicates that its worth in the market is more than the present value. This in turn shoots up company’s stock prices post buy back.

Thirdly,
some companies may also use it as a tool to change their capital structure i.e. debt-equity ratio in specific. By buying back the shares from open market, a company may increase its reliance on the debt financing rather than equity financing. Moreover interest payment on debt is tax deductible. So after tax cost of debt is quite lesser than shareholders return on equity.

Fourthly,
companies also go for buyback with intent of projecting better financial ratios as indicated below:
EPS: Earnings per share = Earnings/ Shares outstanding

Since outstanding shares reduce, the company’s earnings are now divided amongst less number of shares for calculating EPS value. From investor’s point of view, higher the earnings per share, better it is as an investment option. Thus even though the earnings of a company are still the same, but EPS value post buyback is increased.

RoA and RoE
When a company buys its stock, the cash assets on its balance sheets reduce. This increases the return on the assets value. And further due to reduction in the outstanding shares in the market, the RoE value also shoots up.

This is all about the company’s intent of investing its cash in itself, but from the investor’s perspective, buybacks are most of the times euphoric.

The reason is :
either they will end up making profit by selling them to company at an attractive price or it leads to higher stock price due to reduction in outstanding shares in the open market . But as a common investor, what one should be careful about is the fundamentals of the company going for any corporate action.

Bull Market

Classic market Types
There are two classic market types used to characterize the general direction of the market. Bull markets are when the market is generally rising, typically the result of a strong economy. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. Bear markets are the opposite. A bear market is typified by falling stock prices, bad economic news, and low investor confidence in the economy.

A bull market is a financial market where prices of instruments (e.g., stocks) are, on average, trending higher. The bull market tends to be associated with rising investor confidence and expectations of further capital gains.

A market in which prices are rising. A market participant who believes prices will move higher is called a "bull". A news item is considered bullish if it is expected to result in higher prices. An advancing trend in stock prices that usually occurs for a time period of months or years. Bull markets are generally characterized by high trading volume.

Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low. Bear markets are the opposite--stock prices are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation.

A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Investors often attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward.

Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios. Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures and currencies they believe will gain value. Growth is what most bull investors seek.

What is a Bear Market?
The opposite of a bull market is a bear market when prices are falling in a financial market for a prolonged period of time. A bear market tends to be accompanied by widespread pessimism. A bear market is slang for when stock prices have decreased for an extended period of time. If an investor is "bearish" they are referred to as a bear because they believe a particular company, industry, sector, or market in general is going to go down.