The buyback of shares is a strategy that companies that are listed on the equity markets carry out with some frequency. It has been seen in recent days with one of the most active stocks on the Spanish stock market. Because in effect, while the stock market around the world fell with special force and intensity, Naturgy was one of the few securities that appreciated the most among the listed Spanish selective, with rises of more than 1%. The reason must be found in that it has invested 20,5 million in buy back 904.207 treasury shares. A performance that misses a large part of small and medium-sized investors when equities are in a clear downward trend.
Specifically, within the framework of its buyback program own actions of the company, Naturgy acquired 249.716 of its titles on December 18 at an average price of 22,79 euros and another 173.118 at an average price of 22,94 euros on the 19th of this month. Likewise, the company repurchased 216.373 own shares last Thursday, December 20, at an average price of 22,75 euros per share and a total of 265.000 of its shares at an average price of 22,31 euros to end the week.
Through this action, the national energy company has decided to increase the volume of acquisitions of own shares, since between December 7 and 14, the energy company had repurchased 525.651 own shares at an average price of between 22,14 and 23,09 euros per share. It is striking when this company is one of the companies with the best performance in the previous trading year. Along with the rest of the electricity companies that are listed on the stock market, such as Iberdrola or Endesa. It is, therefore, a movement that has drawn the attention of financial agents and intermediaries.
Buy back: cheaper prices
One of the objectives for effecting the share buyback is the fact that it is done to create and increase own portfolio under much more competitive prices than before. From this general scenario, it is usually a practice used by listed companies more or less frequently. With the aim of increasing its portfolio, generally at a better price than the shares of listed companies had before.
This strategy is usually developed when the value of their prices depreciates as a result of a bassist stage in equity markets. When their prices have received a very strong punishment as a result of several factors that will be analyzed in another more specific article on this section of investment. So that you have it a little clearer from now on, this is what Naturgy, the former Natural Gas, has done recently. In other words, it has been strengthened in its positions and in a substantial way.
Psychological effect of this operation
The repurchase of shares by the listed company itself has an immediate effect on small and medium investors. They have a lot of confidence in the company that until a few days ago and in a good part of the strategies used they decided to take positions in the value or simply the increase proportionally. As they note that the company has a lot of faith in the possibilities of its line of business, they think that it is best to replicate these movements, in one intensity or another.
Generally, these kinds of operations are carried out in the medium and long term. Although there is no shortage of speculative movements whose main objective is to make the savings profitable in the shortest possible time. Although an essential requirement to join this very special strategy in the equity markets is have the necessary liquidity as to undertake these operations on the stock market. Not all small and medium investors are in this situation, as you yourself will know from your own experience in this kind of movement in the shareholding.
Advantages of this accounting movement
It is the opportune moment to reveal which are the most relevant benefits of making these movements in the market. Well, the buyback of shares is one of the ways in which a company can give back to its shareholders. In many cases through the distribution of dividends among its shareholders. On the other hand, it should be noted that this accounting operation may indicate that in the end there are managers and large investors who show their confidence in the company. And therefore, the best way to prove it is by buying shares. It is, after all, a message of confidence that they offer to investors.
On the other hand, it has another tracking effect among small and medium investors. That in the end they imitate or replicate these actions with the confidence that the stock price will rise, at least in the medium and long term. Although this scenario does not necessarily have to be fulfilled, which would be highly desirable for a large part of the financial agents. Beyond other technical considerations and maybe also from the point of view of its fundamentals.
Strategies that are used
An uncomplicated method used by a large part of small and medium-sized investors is to opt for the buybacks made by listed companies to monetize your savings in a safe and effective way. Not surprisingly, these data are made public in the main media specialized in equity markets. From this general scenario, it is an operation that is very profitable to carry out when the terms of permanence go to many years seen.
On the other hand, the buyback of shares should be carried out when the price of the shares approaches its bottom in periods of very downward trend. It is the right time to take new positions in the value since from those levels the profit potential it is much higher than before. Beyond other technical considerations and maybe even from the point of view of its fundamentals. It is a strategy used by some of the companies that are listed in equities.
Effects generated by this movement
The repurchase of shares in itself is neither positive nor negative, but on the contrary, it will depend on its evolution in the financial markets from that moment on. But in any case it has some effects that are common to this kind of operations and that are based on the following contributions that we expose you below.
- The weight within shareholders of a listed company, at levels that depend on the purchases made at that time.
- If everything unfolds correctly the profit level it will be much larger in the next few years. A factor that on the other hand increases if that company distributes dividends among its shareholders. Adding, therefore, value to the shares and in an exponential way.
- It is a movement that is aimed at very long periods of stay and therefore not to movements of a speculative nature or with the idea of undoing positions in a few months or even years. The desire to stay is one of their common denominators and for which they recognize this kind of purchases in the equity markets.
- It is a very effective and reliable strategy if it is developed in companies of mid and large cap. In particular, that they have great stability in their business lines. For example, banks, electricity companies, oil companies or insurance companies.
Is it suitable for retailers?
In any case, one of the questions raised by this movement in the stock market is whether it is favorable for the interests of small and medium-sized investors. And especially if they must adopt this investment strategy. Well, in this case it is an operation that carries more risks because they can affect the level of liquidity presented by the user's accounts. With the aggravation of having to sell the shares if they do not evolve favorably in the coming months or years. With the possibility that the sale has to be made very far from the purchase price.
For this reason, special precautions must be taken to carry out this operation. Unless you have a clear vocation of permanence and in which case it can become a clear business opportunity. Where the results will be reflected in the medium and long term. Therefore, it will be necessary to be very clear about the objectives pursued in the investment. In other words, you can't buy back stocks just like that. If not, on the contrary, there must be a force majeure to carry out this movement in the equity markets.
Not surprisingly, it must be taken into account that the opposite and unwanted effect may occur and that it is none other than the company's price to depreciate, even at levels that cannot be assumed by a very specific profile of retail investor. It is the main risk that is contracted with these new purchases.