Overnight changes

Q

I observed a stock start trading one morning at a price very different from where it closed the day before. Can you explain that?

— F.W., Greensburg, Pennsylvania

A

There may have been a stock split, or some big news (or rumors) may have broken after the market closed. If, for example, the company is being bought out or it posted an unexpectedly good or bad earnings report, that could have caused buy or sell orders to pile up overnight, resulting in big overnight price moves.

Stock prices simply reflect supply and demand, so if lots of people want to sell, the price will fall to a point at which some will buy — and vice versa. After-hours trading, which occurs before the market opens and after it closes, is another factor.

Q

Are share buybacks good for a company’s shareholders?

— P.A., Tulsa, Oklahoma

A

It depends. If a company buys back shares when they’re overvalued, it’s wasting money that could have been spent in more productive ways (such as being paid out as a dividend or used to grow the business). But if it repurchases shares when they’re undervalued, that benefits shareholders.

The shares bought back on the open market are essentially retired, leaving each remaining shareholder owning a bigger piece of the company. For example, imagine that earnings at the Rubber Chicken Catering Co. (ticker: CHEWY) are $3 million and it has a million shares outstanding. Its earnings per share (EPS) are thus $3. If CHEWY buys back a tenth of its shares, leaving 900,000, then its EPS suddenly rises to $3.33 ($3 million divided by 900,000). Still, investors should prefer earnings to grow mostly due to business growth, not share buybacks.