Learn the stock market › How listed companies work › Lesson 5 of 8
What is a stock buyback?
A way to hand money back
A company with money to spare can pay it out as a dividend or buy its own shares. The made-up company here has 1,000 shares and spends $1,000 on 50 shares at $20.00.
| Step | Before | After the buyback |
|---|---|---|
| Profit for the year | $500 | $500 |
| Number of shares | 1,000 | 950 |
| Earnings per share | $0.50 | $0.53 |
| Your stake with 100 shares | 10.0% | 10.5% |
The profit is the same but is shared by 950 shares, so earnings per share rise 5.3%. If you own 100 shares and don't sell, your stake goes from 10.0% to 10.5% without you doing anything.
Why the price doesn't rise by itself
The same money could have been a dividend of $1.00 per share. In a buyback it goes to whoever sells instead. The company has less cash afterwards, so each share is a bigger part of a company with less money.
A buyback at a good price favors those who stay, and one at too high a price favors those who sell. You can't see which directly, because it depends on what the stock is really worth. So higher earnings per share isn't the same as a company doing better.
There is one more difference for an owner: a dividend arrives as cash, while a buyback only turns into cash if you sell.
The tax
Since 2023, a US company pays a 1% excise tax on the value of the shares it buys back. The company pays it, not the shareholder.
Test yourself
A company earns $1,000 and has 100 shares. It buys back 20 of them. What happens to earnings per share?
Sources
- Internal Revenue Service, About Form 7208, Excise Tax on Repurchase of Corporate Stock, read on 5 November 2026.
- Internal Revenue Service, Notice 2023-2, read on 5 November 2026.