How to share buy-backs and redemptions differ?


When the company wants shareholders to turn in part of their shares for cash, it has two options: he can redeem or buy back shares.

Repurchase of shares when the company issued shares buys shares back from its shareholders. At the time of redemption or repurchase, the company pays to shareholders market value per share. With the repurchase, the company may acquire shares on the open market or from their shareholders directly. Share buybacks are a popular means to return cash to shareholders.

Redemption is when the company requires the shareholders to sell part of its shares back to the company. For the company to buy back shares, it should be provided that these shares are redeemable or callable. Such shares have a set price called that the price per share that the company shall pay the shareholder upon redemption. Payment is made at the beginning of the issue of shares.

Repayment or redemption

The company may redeem for repayment for several reasons. When the stock is trading below the call price of the shares, the company may acquire the shares at a lower share price, by purchasing them from shareholders in the framework of a share buyback. The company can offer as incentive to buy the shares at a higher price than the current market, but below the call price of the shares.

The company may buy back shares to reduce stock, which increases earnings per share or EPS. As a result, the foreclosure generally moves the stock price higher by reducing the supply of shares. When the stock price is low, the company also can adopt buy-low, sell-strategies and earn the profit on the resale of the shares on a later date.

Sometimes a company buys back enough shares to regain majority status of the shareholder, which is obtained by owning more than 50% of the outstanding shares. A majority shareholder can dominate the voting and exercise a strong influence on the direction of the company.


The company issued redeemable preferred stock with rates of $150 per share and decided to buy some of them. However, the stock is trading at $120 on the market. Company executives can choose to buy back stock, not paying $30 for the premium associated with the redemption. If the company is unable to find willing sellers, he can always use redemption as a fallback.

Conversely, if the company pays a dividend of 3% of the shares in the case of redeemable shares, which carry a high rate of dividends, the company may elect to repay the more expensive stock, with a higher rate of dividend. One of the advantages of issuance of redeemable shares is that it gives flexibility to the company if they want to buy shares at a later date.

Sometimes companies can buy and sell stocks as investors. If the company think their stock is undervalued, they can buy back shares over the discounted price. If the price of a stock will increase in the future, the company is able to issue shares at a higher price per share received income from the sale compared to the original redemption price.

Bottom Line

Redemption involves buying back company shares, either on the open market or directly from shareholders. Unlike redemption, which is required, the sale of shares back to the company with a buyout is voluntary. However, a ransom, usually pays investors premium built into the price to call, to partly compensate them with the risk that their shares redeemed.

More information about redemption, please read “why companies are buying back their own shares?”

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