The biggest buyers of stocks on US exchanges aren’t pension funds or retail investors. The dominant force in the equities market is companies buying their own shares. Stock buybacks, as the practice is known, please shareholders by boosting the worth of their holdings — and benefit managers whose bonuses are tied to stock prices. Buybacks have drawn criticism from President Joe Biden and his predecessor, Donald Trump, who both said they’d rather see companies use profits to create new jobs. Buybacks set a record in 2022 even as Congress voted to impose a 1% tax on them. Many analysts are forecasting a drop in 2023, not because of the new tax but as companies conserve cash in the face of an expected economic slowdown.
Investors buy a stock because they hope its price will rise and to get a share of the company’s profits. The traditional way for a company to distribute profits is through dividends, payments made directly to shareholders. Buybacks benefit shareholders in two slightly more indirect ways: Adding to the demand for the stock can lift or support its value, and buybacks can make stocks more attractive by improving financial metrics like earnings per share, since a company’s profits will be divided among fewer shares.