stock investment

My guess on CBA Share buy back

Recently I received an offer from CBA about their share buyback program. They are offering to buy back shares with the total value up to $6 billions. And I am curious of how it affects my existing holding. I took a bit of researching and come up with a guess on how the share price will change.

Tl; dr;

The share price may drop slightly (4.44%) due to the difference of share outstanding and shareholder equity, before and after the event. The drop is too small to do anything meaningful and fit my investment strategy.

What is share buy back?

A company can offer investors to buy back shares from their portfolio. This reduces the floating shares on market, and decreasing the market capitalization as the result.

In the case of CBA, they offer to buy back shares from investors with a certain discounted price, as specified in the booklet. I am sure there are cases where people need to relinquish the share that they are holding, but it is not easy to dump a few hundred millions worth of share into the public market. Therefore these share buy back may be a great way to get rid of the shares without people knowing.

Assumptions

  • The Price/Book ratio is unchanged.
  • CBA successfully buys back the maximum amount of shares that worth $6 billions.
  • CBA buy back price is the market price at the time this blog is written.

The calculation

First, let us see what are the current figures of CBA. For the calculation, I need to find the following details.

  • Current share price;
  • Current share outstanding;
  • Current market capitalization; and
  • Current Book value, or Price/book ratio

Luckily, we can easily find all these information in Yahoo Finance.

At the time of writing, the information is as follows.

CBA current figures
Current CBA related figure

Note that the green values are the manual input value, while the other fields are calculated from the green field.

Next, I attempt to calculate the new share price, by following this logic.

  • After share buy back, the outstanding share will be $6 billions worth of share less.
  • CBA will spend $6 billions from its pocket to buy back these shares, which means the shareholder equity will decrease by $6 billions.
  • The new book value per share will be recalculated by dividing the new shareholder equity by the new share outstanding.
  • Recalculate the new share value by multiply the book value by the price/book ratio.

The result will look like this.

After buyback calculations
Final calculations

As we can see the expected share price is smaller than the current share price. However it is a very small amount. And therefore it is meaningless for me to do anything about it.

Summary

Off market share buy back is a good way to release capital from CBA shares. However since I don’t like selling shares, especially shares of a seemingly stable company like CBA, I will not participate in this buy back opportunity. And based on the above calculation, I feel that there is no use in doing anything related to the price drop estimations.

I will keep an eye out for the price. The buy back date is 04 October, so I expect the share price to be adjusted to the price above within days of 04 October.

Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it. – Peter Lynch

By Tuan Nguyen

stock investment

Investing – Types of orders in stock market

As a novice stock market investor, I often find it confusing about different types of order when buying ordinary stocks. Here are the information I collected for the different kinds of orders.

Tl; dr;

  • Stop order: triggers buy/sell stock when stock price reaches a predefined price. When triggered, stop order becomes market order.
  • Market order: matched the closest orders in the current market, the condition is different between buying and selling.
  • Limit order: Sell price >= trigger price, or buy price <= trigger price.

Stop order

Probably the most complicated one when it comes to buying stock in the normal way.

Supposed that you want to buy 10 stock X, currently trading at $9. You put in a stop order at $10. The market depth is as follow.

Stop order market depth

Now, the order will be fulfilled as follows:

  • 4 stocks for $10 each
  • 1 stock for $9 each
  • 3 stock for $11 each
  • 2 stock for $12 each

Why is this happening?

The stop order triggers at $10, so it starts buying all stocks that are selling at $10, in this case there are only 4 stock. After that, the order becomes a market order (more on that below). And with market order, it will buy stocks from lowest to highest price available in the market, until the buy order is fulfilled.

Market order

When you buy a stock with market order, you don’t care how much you’re paying for it, as long as someone is willing to sell, you are going to buy. The same happens when you sell a stock with market order.

Market order market depth

Let’s examine the same market depth, only difference is that the buying price now is the market price. The order of buying is as follows

  • 1 stock for $9
  • 4 stock for $10
  • 3 stock for $11
  • 2 stock for $12

As we can see, we end up with the same total as the example in Stop order, however the order of purchasing is different. We buy it from the lowest price first, and work our way up. In the sell order, the order is reversed, we sell with the highest buying price first, then work our way down.

Limit order

This is easy to remember, the limit order only allows the broker to buy a stock price when it reaches the trigger price, or lower. And to sell when it reaches the trigger price or higher.

Limit order market depth

With the above market depth, the buy order is as follows:

  • 1 stock for $9
  • 4 stock for $10
  • 3 stock for $11
  • Remaining 2 stock in the buy order

The stock broker will not buy any stock that is priced above $11.

Summary

The 3 different types of orders are the most popular order types in buying and selling ordinary stocks. There are a lot more that we can explore on other form of trading stocks. However they are more advanced and allow you to understand the instruments deeper to use them.

Risks come from not knowing what you’re doing.” – Warren Buffett

By Tuan Nguyen