Final answer:
When companies repurchase their own stock from the open market, these shares become 'treasury shares.' Such actions can signal the company’s belief in its own undervaluation and can have financial benefits like increased share value and improved financial ratios.
Step-by-step explanation:
When a company buys back shares of its own common stock from the stock market, these are typically known as treasury shares or treasury stock. Unlike regular transactions on the stock market, where buying and selling of shares occurs between investors with no financial return to the company, a buyback means the company itself is repurchasing the stock. This can be likened to you purchasing a house from the current owner, where the original builder does not see any of the transaction funds; similarly, in the stock market, the firm that originally issued the stock does not ordinarily participate in the resale of shares.
Stock represents ownership in a company, and when a firm decides to sell its stock to the public, it becomes a public company. Ownership is divided into shares, and these shares are what investors buy and sell. Major corporations like IBM and Microsoft have millions of shares owned by a broad base of shareholders, none of whom typically own a majority. These shareholders have voting rights within the company, proportional to their share ownership, and they elect a board of directors to oversee the company's operations.
A stock buyback has various implications for a company and its shareholders. It can be a sign that the company believes its shares are undervalued, and by reducing the number of shares in circulation, a buyback can increase the value of remaining shares, enhance financial ratios, and potentially improve earnings per share (EPS). It's a financial strategy that needs careful consideration and is subject to regulation and market conditions.