Final answer:
Buying back shares reduces the number available, which can raise the price due to supply and demand. It signals management's confidence in the company and improves financial ratios, increasing investor interest and potentially the stock's market price.
Step-by-step explanation:
Buying back shares as treasury stock helps support the market price of a company's shares in a couple of ways. When a company purchases its own shares, it reduces the number of shares available for trading in the market. This supply reduction can lead to an increase in the share price due to the principles of supply and demand - fewer shares on the market can mean higher prices if demand remains constant or increases.
Furthermore, share buybacks signal to the market that the company's management believes the shares are undervalued, which can boost investor confidence and lead to an increase in the stock's demand. Buybacks also improve financial ratios such as earnings per share (EPS), since there are now fewer shares outstanding, potentially making the stock more attractive to investors.
Companies often engage in share buybacks after substantial analysis by financial experts, understanding that such actions can be an effective strategy to benefit shareholders. The company does not receive financial return from the sale of shares in the secondary market, but through buybacks, it can actively influence the stock's market price, satisfying the investor's expectation of a rate of return, which can come from dividends or capital gains.