Definitions 
Shares buy backs are when a company purchases its owns shares back from its shareholders. Although companies may chose to buy back shares at any point, most companies will fund the purchase of shares out of the profit made in any one year.
Let us imagine that a business makes a profit of $100 million. Most companies will need to pay cooperation tax on this first (let’s say they pay $20 million, leaving them with $80 million). With this $80 million, they may now choose between retaining the earnings, buying back shares or issuing dividends.
Share Buy Backs: The logic
The logic behind buying back shares is as follows: If a company, buys back its shares (and cancels them) the number of shares outstanding becomes smaller. As a result earnings per share (EPS) and dividends per share (DPS) for the remaining shares will rise.
Share Buy Backs: The Advantages
An advantage of share buy backs have over dividends is that it avoids the double taxation associated with dividends. As an example, let us imagine that a business has $10000,00 it wants to return to shareholders. If they choose dividends (and shareholders were taxed at an average of 20%) shareholders would only receive $80000,00. However, if management choose share buybacks, the company can repurchase share worth $10000,00. The value to shareholders will however vary depending on the price the company pay for the repurchased shares.
Share Buy Backs: The disadvantages
The disadvantage of share buy backs is that shareholders do not see the money. The buy back of shares will not neccessarily increase the value of the remaining shares. It is up to the market to factor in the share buy backs correctly, and this cannot be guaranteed, especially over the short-term.
