The first thing to consider is what actually a share buyback is. A share buyback describes the situation where a company decides to buy back it’s shares from it’s shareholders. In other words, a company may announce that for a certain period, shareholders can sell their shares to the company and the company will subsequently cancel these shares.
The second thing to consider is when a share buyback can happen and what exactly does it mean. Let’s say that a company only has two shareholders each of which hold two shares. If the company decides to buy back two out of the four available shares and assuming that each of the two investors sell one of their shares, then effectively nothing will change.
The company will manage to distribute cash to its’ shareholders while the holdings (the relative holdings) will remain unchanged.
Share buybacks is an alternative to the dividends way to distribute cash. Companies choose share buyback when they believe that their shares are undervalued, if there are disagreements between the shareholders or if there is a big cash surplus. Finally, a share buyback can be used to boost the earnings per share ratio since the earnings will remain unchanged but the number of shares will decrease.