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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.
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
, 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.
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.
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.)
Much of the problem has to do with the process. In order to buy the stock on the local exchange, like Toronto or Hong Kong, your broker has to change your dollars into the local currency and then buy the stock. That's a hassle for the broker and not worth his time for the cheap commissions at stake.
On the other hand, if you are a big hitter with a hefty account at a full-service broker like
,then you may be able to shop for foreign stocks, because these firms will take care of the currency transaction as well. Of course, such service comes at a full-service price -- so be prepared to pony up.
If you are willing to wait, online broker
says that it will be offering customers the ability to shop on foreign exchanges in the third quarter of 2006. Those exchanges will include London, Hong Kong, Switzerland, Toronto, Germany and Japan.
So if your ultimate intention was to invest in an Icelandic stock, you're out of luck.
What is the difference between common and preferred stock and how do you know which one you are holding? -- D.E.
If you own a share of common stock, it means you are a partial owner of a company. Owners of common stock usually receive the right to vote at meetings regarding company directors or corporate policy. The shareholder is the ultimate boss, according to U.S. corporate law.
Preferred stock, on the other hand, represents nonvoting shares, but they usually provide a higher dividend than common shares. To make up for the lack of voting rights, preferred stock dividends are paid before common stock dividends. In a liquidation, preferred stock is paid out at par value, which is commonly $100 or $25 per share.
Usually, preferred stock is identified as such, but if it isn't, then the high dividend and lower volatility will typically give it away.