How Buybacks Work
A buyback is when a company uses its cash to purchase its own shares. Fewer shares remain, so each one owns a bigger slice of the business. Here is how buybacks are carried out, the rules around them and what happens to the shares.
The basic idea
Think of a company as a pie cut into slices, one per share. When the company buys back and retires some shares, the pie stays the same size but is cut into fewer slices. Every remaining shareholder now owns a slightly larger piece of the profits, without buying anything.
A company is all of its shares; retiring some makes each remaining slice bigger.
How companies buy back stock
- Open-market purchases: the most common method. The company buys gradually through a broker, like any other investor.
- Tender offers: the company offers to buy a set number of shares, often at a premium, directly from shareholders.
- Accelerated repurchases: the company pays a bank up front to deliver a large block of shares quickly.
The rules
In the U.S., the board of directors first approves an authorization, the maximum dollar amount the company may spend, often over several years. Most companies follow the SEC’s Rule 10b-18 safe harbor, which limits how much they buy each day (generally no more than 25% of average daily volume), when they buy and at what price, so buybacks do not manipulate the stock.
Since 2023, U.S. public companies also pay a 1% excise tax on the value of shares they repurchase, net of new shares issued. That rate is still 1% in 2026.
What happens to the shares
Repurchased shares are either retired or held as treasury stock, which the company can reissue later, for example to pay employees. Either way, they no longer count as outstanding, and they do not vote or receive dividends.
Key takeaways
- A buyback shrinks the share count, so each share owns more.
- Open-market purchases are the most common method.
- Boards approve authorizations; Rule 10b-18 limits daily buying.
- U.S. buybacks carry a 1% excise tax.