A buyback refers to when a corporation repurchases its own outstanding stock. By doing so, the number of overall shares in the market drops and the value of each individual share tends to increase. Issuing a buyback offer is not binding on any individual shareholders and merely represents the corporation's offer to purchase shares at a given price.
Buybacks are one of the primary tools a corporation can use to fend off a hostile takeover or raider attempt. By repurchasing a controlling share of the corporation, the company prevents another party from seizing control against the wishes of the board of directors.
Nonetheless, stock buybacks are controversial because they can arguably be viewed as market manipulation. As a result, a company wishing to engage in repurchasing their own shares must follow the procedures and regulations outlined in Security Exchange Commission rule 10b-18. These procedures include registering a specific day in which the buybacks will take place and restricting the company’s ability to set the price of their buyback offer.
[Last updated in June of 2022 by the Wex Definitions Team]
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