Buybacks: Good or Bad?

Q

Are stock buybacks a good thing? — K.G., Adrian, Michigan

A

They can be. A stock buyback is when a company buys back some of its stock, essentially retiring those shares. It can be a great way to reward shareholders, because when there are fewer shares of the company, each is worth more.

Imagine, for example, if a pizza is suddenly cut in six pieces instead of eight — each piece is bigger. Consider this extreme example: If you own 10 of a company’s 100 shares, you own 10 percent. But if it buys back 50 shares, your 10 now make up 20 percent of the company.

Buybacks can destroy value, though, if a company spends that money on overvalued shares. They should only be executed when shares are undervalued (or fairly valued). Otherwise, that money would be better spent, say, paying out a dividend, paying down debt or growing the business.

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Q

What are “Spiders”? — J.J., online

A

That’s a nickname for Standard & Poor’s Depositary Receipts (SPDRs), which trade with the ticker symbol SPY.

Much like S&P 500-based index funds, Spiders include ownership stakes in all 500 companies in the index, such as Apple, Boeing, Costco, CVS Health, ExxonMobil, Facebook, Ford, Kroger, McDonald’s, Nike, Pfizer and Visa. Unlike index funds, though, which operate much like traditional mutual funds, Spiders are exchange-traded funds (ETFs), structured more like shares of stock.

While mutual funds sometimes require minimum investments of thousands of dollars, you can buy and sell as little as one Spider share at a time. (Recent price: $274 per share.) Learn more at fool.com/etf/etf.htm and morningstar.com/etfs.html.

Spiders are a simple and handy way to be invested in much of the U.S. stock market.