Where do those shares then go? Are they just gone forever?

Or do they then turnaround and give them to employees?

If its gone forever, then… why? They just bought something and burnt it? Isnt that like a waste of resources?

The stock market, still to this day is a very very strange thing…

The company is owned by the shareholders. When shares are ‘burnt’ the remainder of the shares become more valuable.

It’s easy to see if you imagine there are only three shares and one of them is torn up. The other two now own the entire company.

It’s a way of giving money to shareholders without the value being realized in the sense of being immediately taxable.

Let's say we own a company with 10 shares, I own one share, you own 4, and 5 are owned by others. Each share is worth $100 (to make it simple).

The company has $100 "to spare" - they could pay a dividend (give me $10, you $40, $50 for "the others") - but they'd be taxed on the income they made to be able to pay this, and you and I would be taxed receiving the dividend. We'd net out maybe $8, maybe $7 per share.

Or they could buy my share for $100, and retire it. I get the $100 (and pay capital gains tax unless it was in an IRA or otherwise not an issue). You now own 4 shares of a 9 share company, which is worth the same, but your percentage is a big bigger now.

Getting rid of the double taxation of dividends would likely slow down or end most buybacks; the main advantage is that they let the shareholders decide if/when they take the tax hit.

If you look at all the tech companies doing buybacks, usually the shares created for employee RSUs matches or exceeds the shares retired from buybacks.

Not in all cases, but many

Which is why GAAP earnings matter and not free cash flow

> If it’s gone forever, then… why? They just bought something and burnt it? Isnt that like a waste of resources?

You might have an easier time with some numbers.

A corporation called Hluska trades at a market cap of $100. Hluska has issued 100 shares. Now, let’s say that Hluska burns ten shares and the market cap stays the same. Now it trades at a market cap of $100 but it has 90 shares outstanding.

Stock holders will only lose stock if they sell stock. In that case, they will be taxed at a capital gains rate which is generally lower than the tax rate on income from dividends. So it’s a way to return capital to shareholders who want out in a tax effective way.

If it doesn’t work, it’s a waste of resources. Let’s go back to our example, that idiot Hluska was trading at $100 with 100 shares outstanding, burned 10 and now trades at a market cap of $80. In that case, yeah, it’s a waste of resources because each individual stock is worth less money post burn. But that doesn’t really happen very often. A better capitalized company than Hluska with its soaring $100 market cap should be able to withstand a burn event without crushing market cap by 20%.