The buying back of shares is a dangerous financial strategy as it Essay

The buying back of shares is a dangerous financial strategy as it increases the company's capital gearing. Evaluate this - Essay Example There are different motives that would attract the companies to buy back the shares and there are different techniques that can be used to go through the process of stock repurchase. Different techniques that can are used by the companies for their stock buy-back are as follow: Company offers to purchase the shares from their shareholders at a premium price thus it gives value to them and extra return over price they actually had paid for the shares when they were bought. Companies often buy back their shares from the open market like an ordinary investor purchasing shares and making investment. It is often seen that the market and shareholders perceive the decision of the company to buy back the shares as a positive move and shareholders expecting higher returns stimulates stock price of the company (Larry, 1981). Motives for stock buyback Different circumstances and requirements of business conditions can influence management of share repurchase. Such motivating factors along with their reasons are discussed below: Market perception It is the perception of the shareholders and potential investors that exists in the market matters for future of company. Company is believed to use capital or extra finance available to them to buy back its shares thus giving the perception in market that there shareholders would be valued as they are provided the opportunity to trade possessed shares at the premium price (Udo & Richard, 2003). Thus removing any negative market perceptions that the stock price of the company has fallen and they have low future expectancy that what effects dealing of shares in market. It is often due to low earnings reported by the company in past some period, its operations effected by some scandal or lawsuit thus the share buyback is used as an option to remove any negative perceptions that are prevailing regarding the company in the market (David, et al., 1995). It is becomes necessary for the company to make the share buyback as market due to such instances and incidents might value the share price way low and shares are being traded at value that is below the expectancy of company thus in order to keep a standard for their shares in market and keeping value for their shareholders alive however it is believed that hike in share prices through this approach is of nominal period (Mansor, et al., 2011). Financial Ratios It is a usual practice in the market adopted by the investors before making any investment they make decisions on the basis of research and evaluation of the companies that are seem potential for the investment. Financial ratios of the company are most basic and foremost results that are used for the evaluation of the company. It is part of rational decision making of the investor as they evaluate their choice of investment before making the final decision (Amy, 2000). Thus share buyback can be the part of an accounting technique to get the desired results for the company as however it is the personal financ e of the company that they utilize to buy-back the shares thus it is confidence that the companies have on their abilities that makes them repurchase the outstanding shares that are either absorbed or turned to treasury stock. Thus the purchase reduces assets of company as it is the cash that is being paid for purchase of the shares therefore one of most important