WHY STOCK BUYBACKS CAN EITHER BE GOOD OR BAD

Stock buybacks are when a company spends its excess capital to buy back shares of its own stock. Investors generally consider buybacks a good thing because it can signal that a company is confident in its future and sees no better investment than itself.

Publicly held companies have these choices when it comes to spending profits:

1) Offer dividends to investors - dividends are a way to directly funnel profits to investors.
2) Do a stock buy back - stock buybacks can indirectly make investors money because the stock price might go up as the company buys shares.
3) Use the money for research and development - using the money for R&D is an investment in the future and will hopefully pay off at a future time.
4) Buy other smaller companies - buying another company is something that can make the buying company stronger by adding new technology and new products.
5) Sit on the money and invest it - keeping the money and investing it is something that might add security to the company as they build savings that could be used to keep the company afloat in tough times or be used in any of the above ways later.

Stock buybacks have become popular in recent years (you can get a current list of announced buybacks here) and the biggest one on record is Apple's buyback. Anything Apple does gets a ridiculous amount of scrutiny so there are a lot of opinions rattling around the Web. But with all those opinions you can sift through and sometimes find the truth and that truth is that a buy back can turn out to be a good thing or a bad thing.

Stock Buybacks Can Be Good

When a company spends its own money buying its own stock, it might show that management is confident in the future (after all they know best whats in store in their pipeline of products). They feel that there is no better investment out their than their own stock so that is a vote of confidence that many investors like. 

Also, when a company does do a buyback, that means there will be shares bought and that will/should/can help drive up the price of the stock. This will of course depend on the number of sellers but having guaranteed buyers is a good thing. So, investors may profit from a buyback by seeing their shares appreciate in value.

But, Stock Buybacks Can Also Be Bad Because...

When a company buys back any amount of its shares on the open market, they are paying the same price you or I would if we bought the stock. So if they pay a hypothetical average price of $100 per share and after they do that the stock goes down and continues going down, it sure looks like they paid too high a price. That is bad. Just like investors can buy stocks at too high a price and get burned, so can companies who buy back their own stock. Figuring out what the correct value of their company is and making sure they pay a price that is lower than that is key for management.

Another reason a stock buyback could be interpreted to be a bad thing is if investors decide a company is doing a buyback because they are out of ideas for better ways to use the cash. Remember, investors are always looking for businesses that are growing so they can make more and more money. That is why R&D and M&A are often considered good ways to spend money - it shows that company management is thinking forward and trying to grow the business. Just buying back their own stock could indicate a lack of new direction which might in some instances be viewed by investors as bad.

DUMB STOCK INVESTORS BUY THE WRONG "OCULUS" STOCK AND LOSE MONEY

Greed and stupidity. You don't want your stock picks to fall into either category!

Yesterday it was announced that FaceBook bought a company called Oculus Rift for $2 billion dollars. While the investing world was busy debating whether that was a smart move, some investors were busy Wednesday morning trying to make a quick buck by buying what they thought was that same Oculus company. What they really bought though, were stocks of other companies totally unrelated and in doing so they lost money, as they should.

First of all, it is and was impossible to buy stock in Oculus Rift because it not a public company and there are no shares to buy! So, anyone who tried to make money this morning by purchasing any stock with the "Oculus" name was uninformed and really shouldn't be investing in stocks until they educate themselves.

Oculus VisionTech Inc. (OVTZ) is one of the companies that saw their stock soar just because they had the "Oculus" word in their name. The stock opened at 18 cents a share and went all the way up to over 35 cents a share before people realized they had made a mistake. The stock even had to be halted for over an hour and as I write this the stock now sits at just 14 cents a share which is back down to where it should be. People who bought OVTZ at the frenzied opening lost a lot!

Oculus Innovative Sciences, Inc. (OCLS) is the other stock that saw some quick uniformed buying before coming back to earth. The stock closed the night before at $4.54 and got all the way up to $5.20 in early trading before the error was noticed. That is about an 8% pop all because people were buying the wrong stock.

Its absolutely crazy that "investors" (and I say that word lightly) can be so dumb that they buy stock in the wrong company. This kind of thing happens because they want to capitalize on a news event and they hope to make a quick profit. But making a quick score in stocks is NOT the way to invest your money and these people ended up losing money instead.