If a company's stock is undervalued - as many managers believe theirs is - a repurchase may offer the best payoff of all.
From Carol Loomis
Approaches to determining stock values vary, but fundamentally, each company judging itself undervalued is saying that its future stream of earnings justifies a higher price than the stock market is willing to accord it.
Some managements do not even think of buybacks as an option. The idea of shrinking their equity base repels them. Their inclination instead is to get bigger, and this often leads them to pay rich prices for acquisitions that never earn their keep.
A buyback is itself a special kind of acquisition, made at prices that are typically a bargain compared with those a company must pay for an outside purchase.
When they are employed wisely, derivatives make the world simpler because they give their buyers an ability to manage and transfer risk.
The options and futures traded on exchanges are derivatives contracts.
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