Stock investing is more than just buying and selling stock. Important on both is the idea of profiting from every transaction made. This requires investors of having to understand the many different characteristics and features of stocks that they may experience in the market at one time or another. One of them is understanding what stock splits and stock buybacks are all about.

Stock splits and stock buybacks may not be as common nowadays as they were before. But they are just as important for stock investors to understand. Not only can they be a source of some profit opportunity, but they can also help provide insights to a certain company that may offer stock splits and stock buybacks. Here are some important things to know about them.

Understanding Stock Buybacks

A stock buyback usually occurs when a company offering a certain stock plans to use some of its cash in order to repurchase some of the stocks that it has offered in the stock market. Since a company cannot be a shareholder of the stock that is has bought back, these stocks are either canceled or converted into treasury shares. In either case, stock buybacks reduces the number of shares available in circulation at the stock market. This may cause the stock value to increase for each share, sometimes for a short period of time.

Probable Buyback Reasons

Stock buybacks can have different reasons, depending on the motives behind the move. Sometimes companies may want to make certain company metrics look better, which won’t change anything in terms of share value. In this case, shareholders may react negatively to this move and may cause a potential sell-off. Sometimes the reason behind a buyback is when a company thinks that its stocks are quite undervalued in the market and might wish to repurchase some stocks to increase its value. This may be considered as a positive move by the shareholders since the value of the stocks they hold will enjoy a value increase in the process.

Understanding Stock Splits

Stock splits occur when companies would want to split a stock share into two. In this case, the total value of the stock shares is divided into two as well. This causes the price of each stock share to go down as well as increase the number of stocks available in the market. One reason that this may occur is when companies determine their stock share value to be too high that it becomes out of reach for smaller investors to have. This may also be considered a positive sign since it can make the shares more available to smaller investors which may drive demand for the stock and causes its value to increase.

Reverse Split

Another similar but opposite move is the reverse split. It occurs when a company tries to combine two smaller shares into one while adding together their value. Reverse splits can have several reasons which some investors may look at with some skepticism. It may come as a result of stocks that are steadily experiencing a drop in value. A reverse split may be used by a company to prevent their stock shares into becoming like a penny stock. A reverse split may be considered as a signal for investors to sell their stocks.