The move of a company to buy back its shares is called buyback. By doing this, the company reduces the number of its shares available in the open market. Apart from increasing the earnings per share (EPM), this move also increases the return on the company’s assets.
Their effect also improves the balance sheet of the company. For the investor, buyback means an increase in his stake in the company. Share buyback is sometimes called buying shares and is usually considered an indication of a jump in the share price.
How does a buyback happen?
The company can buy back its shares through a tender offer or buyback in the open market. In the first method, the company issues a tender offer with details related to the number of shares it plans to buy and indicates the price range. An investor interested in accepting the offer has to fill and submit an application, which contains information about how many shares he wants to tender and what is the desired price. This form has to be sent back to the company. In most cases, the price of tender offer buyback is higher than the price of shares in the open market. According to SEBI guidelines, if the company accepts your shares, it will have to inform you within 15 days of the offer. The other route available to the company would be to gradually buy shares directly from the market.
Where to get information?
All the information related to buyback can be obtained from the stock exchange, because companies need to inform about such proposals.
Why are companies choosing the buyback route?
There can be many reasons for this. Sometimes companies engage in buyback when they feel that the price of shares in the market is falling significantly. In other situations, this can be done by using more cash. However, there is no example of this being done to avoid the company’s takeover.”
What is a lot and what is a margin call?
In fact, unlike the cash market, no share can be bought in arbitrary numbers in the futures market. The exchange decides the minimum number of shares that can be bought. This number is called a ‘lot’. Any share in the futures market is bought in lots only. Although there is no fixed rule about this, but usually the price of one lot of shares is around Rs 2 lakh.
What is margin in futures trading?
Buying shares in lots is obviously very expensive. Therefore, stock brokers provide margin facility to their customers. Under margin, a certain percentage of money has to be given to the investor in terms of the credit of the shares, while the rest of the amount is given by the broker to the investor. Usually, investors have to keep 20-30 percent margin in terms of different shares, while 70-80 percent loan is given by the broker.
What is long and short?
To be long means to buy a stock and to be short means to sell a stock by taking a loan from the broker even if you do not have it.
What are margin calls? Suppose, you went long on a lot at 5,000 in April. One lot of Nifty has 50 units. That means you will have to pay Rs 2,50,000 for the entire lot. Now your broker asks you to deposit 30 percent margin, that means you deposit Rs 50,000. The broker gives you a loan of Rs 2 lakh on your position. Now the market starts falling and Nifty reaches 4,000, that means your position is left at Rs 2 lakh. Now from here, if Nifty goes down even a little and you refuse to increase the margin, then even after distributing the deal, the broker will incur a loss. In such a situation, when Nifty slips below 4,100, your broker will ask you to deposit margin immediately. If you are not able to deposit the amount before Nifty reaches 4,000, then he will get the deal done as soon as it reaches 4,000, so that he gets back the loan amount given to him.
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