If a company buys back the stock, the investor’s ownership is going to decrease, not increase.
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Also, this is the third question in a row with the same answer - Market Risk - in one of the 10-question quizzes: Achievable
I can’t say if it’s helpful or difficult to have the same question asked 3 times in a row (with different languaging), but I thought I’d mention it.
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Incorrect.
Basically, the company buys back the stock which reduces the outstanding stocks.
What does this mean for an investor? Basically, the investor’s ownership % increases.
The only thing that decreases is the outstanding shares of stock.
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I think it’s good to have repeated questions with different languaging so you don’t get complacent with the wordings of the questions.
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Hi @Great_crimson_wolf! Thanks for using the forum. Let’s explore the topic a bit.
If a company buys back the stock, the investor’s ownership is going to decrease, not increase.
Like @FoxMcCloud said, the ownership level (in terms of proportionate ownership) increases. We can demonstrate this with some easy numbers. Let’s assume:
- ABC stock has 100 shares outstanding
- An investor owns 5 of those shares → 5% ownership
ABC buys back 20%, or 20 of the outstanding shares in a stock buyback program. Assuming the investor kept their 5 shares, here’s where we land:
- ABC stock has 80 shares outstanding
- An investor owns 5 of those shares → 6.25% ownership
A share buyback program reduces the number of shares outstanding, resulting in an increase in the proportionate ownership of the investors still left with shares. With fewer shares outstanding, the earnings per share (EPS) will go up assuming the earnings stay the same. Same amount of earnings, but fewer shares… more earnings per share left outstanding.
In regards to the repetition - that’s a feature of our program. While we’re consistently adding more variety soon in terms of question wording, expect that some parts of our material will feel repetitious. The more you see the topic, the more likely you’ll encounter test questions on the topic. I hope this helps!
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To add a little more about the repetition…
I agree with both of you.
We have done it this way so that you get exposed to different versions of the question to ensure you understand the core concept even if the presentation is different.
However, a side effect of this is that sometimes the same concept is tested multiple times in a batch of questions, which isn’t ideal. We have an idea in mind to handle this, but we’ll basically have to go through and tag each one with the specific learning objective rather than the topic it’s associated with. It’ll take us a very long time to add in all this metadata, but it’s on our list!
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That’s a nice point, Fox! Not sure I love the repetition, but I do like your point. It’s important, I think. I’d just like a little separation between the similar questions.
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Thank you, Brandon! Here’s where my confusion lies, and I think it’s worth looking at. When the question asks what happens to ownership when the company does a buyback, the assumption is that the question refers to the investor now having no shares. The question should indicate that the investor in question is keeping her shares - not having them as part of the buyback. Would you say that makes sense?
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By the way, confusion notwithstanding, I get your explanation. Thanks so much for that.
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