Share Market

what is buyback || How does buyback happen

what is buyback?

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, this step also increases the return on assets of the company.

Duetotheir effect the balance sheet of the company also improves. For an investor, buyback means a change in his stake in the company. A share buyback is sometimes referred to as buying a share and is usually considered a signal of a rise in the share price.

How does buyback happen

The company can buy back its shares through tender offer or buyback in the open market. In the first method the company issues a tender offer detailing the number of shares it plans to buy and indicating the price range. An investor interested in accepting the offer is required to complete and submit an application indicating the number of shares he wishes to tender and the desired price. This form has to be sent back to the company. In most cases, the tender offer buyback price is higher than the share price 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 quiz. The second route before the company would be to gradually buy shares directly from the market.

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Where will you get the information

All information related to buyback can be obtained from the stock exchange, as companies are required to inform about such proposals.

Why are companies choosing the path of buyback?

There can be many reasons for this. Sometimes companies engage in buyback when they feel that the share price is falling significantly in the market. In other circumstances this can be done by using more cash. However, there does not appear to be any example of this being done to avoid a takeover of the company.

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 what minimum number of shares can be purchased. This number is called ‘lot’. In the futures market any share is bought in lots only. Although there is no fixed rule regarding this, but generally the price of one lot of shares is around Rs 2 lakh.

What is margin in futures trading

Buying shares in lots is obviously quite expensive. Therefore share brokers provide margin facility to their customers. Under margin, a certain percentage of the amount has to be paid by the investor for the goodwill of the shares, while the remaining amount is given by the broker to the investor. Generally, investors have to keep 20-30 percent margin for different shares, while 70-80 percent of the loan is given by the broker.

What is called long and short

Being long means buying a share and going short means not having any share with you, but taking a loan from the broker and selling it.

What are margin calls

Suppose, you went long for April one lot at Rs 5,000. One lot of Nifty consists of 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 is, you deposit Rs 50 thousand. The broker gives you a loan of Rs 2 lakh against your position. Now the market starts falling and Nifty reaches 4,000. That means your position remains worth 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 losses. In a situation where Nifty slips below 4,100, your broker will ask you to deposit margin immediately. If you are not able to deposit the amount till Nifty reaches 4,000, then he will make the deal as soon as it reaches 4,000, so that he can get back the loan amount given to him.

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