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Ask TheStreet: Buybacks

Ask TheStreet is designed to answer questions about the market, strategies, and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.


Reader: What happens to the shares when a company buys back its shares? Are they still "marketable," as in selling them back into the market? --T.B.

Gregg Greenberg: When a company repurchases its shares in the open market, those shares are not lost forever like sunglasses at the beach or socks in a dryer. Instead, they turn into what is known as treasury stock, which the company can use for a number of purposes, including boosting earnings per share, increasing internal control of the company or filling up its employee stock option or pension plans.

A stock buyback announcement is usually greeted with smiles by investors because it lowers the total number of outstanding shares, thereby increasing earnings per share. Outstanding shares are those that have been issued and are in the hands of the public.

Since treasury stock is issued but not outstanding, it is not taken into account when calculating a company's earnings per share or dividends. With fewer shares outstanding, simple math dictates that earnings per share will increase after a stock buyback, provided the company's earnings stay the same or increase.

A potential downside to a stock buyback is the question if buying back stock is the best thing to do with the company's cash. Maybe buying another company or building a plant is the better option. Also, a stock buyback reduces the public's voice in shareholder votes.

But investors can always vote with their feet if they don't like the company's decision-making by selling their shares.

Reader: Recently, Jim Cramer has been recommending a lot of stocks that trade on foreign exchanges. Is there a discount broker that will let you do this? How about one that will let you do it online? -- M.L.

GG: Unfortunately, most discount brokers do not allow their customers to buy and sell stocks on international exchanges just yet. So if the "Mad Money" man highlights a stock that trades solely on a foreign exchange -- not an ADR -- you may be out of luck. (ADRs, or American Depositary Receipts, are foreign stocks that are listed on U.S. exchanges.)

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