What are the Pitfalls of Stock Buybacks?

The stock market cannot be predicted. There are ups and downs in the market and this is because the stock prices depend upon the economic and social situation in any country. When the economy shows a boom, there is a bull run in the stock market and an economic gloom creates a bear market. But investors and companies have to take advantage of the boom and the gloom to make profits. Trade with great caution, and do a lot of research before putting your money on stocks. Buy during the sluggish conditions and sell during the Bull Run. It is surely not as easy as said because there are a lot of points those have to be taken into consideration.

When a company or corporation buys its own stocks in the open stock market, it considered as a stock buyback condition. The shares purchased in the stock buyback are then re titled as treasury stock and written of as an asset. There are many benefits in stock buybacks but there are pitfalls too. So you have to be very careful and selective when you opt for the companies that have announced buyback of shares.

The drawback is manipulation of earning by companies. When a company buys back shares, the shares improve the companys EPS (Earnings Per Share). Analyst and experts analyze the EPS when they rate a companys stock and recommend it to investors. Sometimes the analysts assume a greater number of outstanding shares before a stock buyback and so give a higher EPS rating. If the timing is right companies will sometimes buyback shares and appear to beat the consensus estimates which were actually based on a greater number of outstanding shares. So you have to be careful and watch out carefully if companies make buyback announcement just before announcing the earnings.

Profits will be greater if the buyback percentage is great. But companies are tightlipped about the buyback percentage while announcing stock buybacks. So you have to do some research and find out exactly how much percentage of stock buyback has happened. Don't take for granted that a large buyback has been announced so it means that a large percentage has been achieved.

There is a very big variation between a buyback announcement and an actual buyback by the company. An announcement will shoot the price of the stock but not all announcements really work out into actions, so be careful till the actual implementation of the buyback.

Read our blog for more information on Stock Trading Tips and Meaning of Stock Buyback.