Q&A Dominic Coyle

Dominic Coyle answers your questions on share buybacks and buying shares.

Share buybacks

I am puzzled by the practice of a company buying its own shares. The two main Irish banks are doing it. Can you say when this became legal? Do the shares bought back qualify for dividends? Are they cancelled or can they be issued again and, if so, at what price? Any information would be welcome. In particular, I would like to know in what circumstances a company would think of doing this and what is the limit on the proportion of issued capital that can be bought.

Mr J.O'R., Dublin

This practice has been around for a long time but did not regularly hit the headlines in the Irish market until the past few years.

The rules here governing buybacks have been borrowed from Britain. Companies must get prior shareholder approval before engaging in a share buyback, something usually done at an annual general meeting.

The motion will indicate the buyback limit and many companies will have a standing motion on the issue to give them some leeway in managing stock.

Any buyback above a certain level requires approval at an extraordinary general meeting, but that is not something that applies to the recent buybacks at the leading Irish financials.

There can also be an issue where buying back more than a certain limit of shares would place one or more shareholders, who are deemed to be concert parties, above the threshold where they would have to bid for the whole company. Companies can seek specific dispensation from the Takeover Panel in such circumstances.

There is also a limit placed by the need to have a certain free float of the shares - shares in public circulation - as part of the Exchange's listing requirements.

When shares are bought back, one of two things happens. Either they are cancelled or they are held as treasury shares, in which case they can be reissued later without the necessity of going through Exchange procedures for listing new shares. That can be quite helpful in the case of stock-denominated acquisitions.

Shares that have been bought back can be re-issued and the price upon re-issue will depend on the prevailing market and the company's attitude.

If the shares are held as treasury shares, my understanding is that they are eligible for dividends but this money would go back into company reserves.

Why would companies do such a thing? Generally because they cannot think what else to do with their excess cash. Companies exist for the good of their shareholders and the shareholders are hardly benefiting if the company has a load of money earning little in a low interest rate environment.

Buying back the shares reduces the number of shares in circulation, pushing up their value relative to the company's overall value even when there is no change in the stock price.

It is also generally seen as an indication to the market that the shares are undervalued.

Companies use buyback authorisation to prop up the share price when they think it has fallen below where it should stand.

Buying shares

Could you please let me know the answers to some questions about buying shares in Ireland? As a foreign student, am I allowed to buy shares? If yes, where can I buy/sell the shares and what's the minimum investment? What fees/commission will they charge? Can I buy and sell the same shares in one day? From where can I get the best information regarding the stock market?

Mr S.X., email

There are no restrictions on who may buy shares in Ireland as long as they are over 18 and have the money to invest.

However, it is important that people realise what equity investment entails. People are notoriously prone to falling for the next "sure thing" promised by friends, advisers, the media or sometimes just the person next to you in a bar.

Equity investment is a gamble. It should be done only with money that you can afford to lose and it should never be done with money that has been borrowed.

Many stockbrokers in Ireland offer the choice of trading in person, by telephone or online. Stockbrokers, in general, are tightly regulated, although it must be remembered that this did not prevent fraud at Cork-based Morrogh's that caused the company to collapse.

Three of the biggest stockbrokers - Davy, Goodbody and NCB - are all owned by banks. The last of the big four, Merrion, is a newish arrival but has made a name for itself in a relatively short space of time. The smaller independent brokers - BCP, Bloxhams, Campbell O'Connor, Dolmen, Fexco - are long established.

In terms of the cost, it is best to shop around. Many brokers have their dealing commissions listed on their websites. The price varies depending on whether you are trading online, by phone or with a certificate. The minimum charges are around €25 with lowest commissions around 1.25 per cent. The large brokers, however, all appear to charge 1.65 per cent for telephone orders.

Shopping around is also advisable in terms of customer service. While preparing this response, I contacted all the brokers. While many did not have the data to hand, all, with the exception of BCP, responded and quickly gathered the requested information.

You can buy and sell shares in the same day although this is generally done online.

You need to remember that, while most investors will only be liable to capital gains tax - levied at 20 per cent on profits earned within a year exceeding €1,270 - people who buy and sell regularly in one day may be termed as professional day traders by the Revenue. This would see their gains taxed as income - up to 42 per cent.

In terms of getting information, it is a matter of personal choice. Some people sign up for daily research from their brokers, others rely on newspaper reports, weekly magazines specialising in such matters (although there is none I know of specialising on investment in the relatively small Irish Stock Exchange) or even chat rooms.

I would argue that The Irish Times produces as comprehensive a day-to-day coverage of events in the Irish market and its constituents as anywhere else but then I would say that, wouldn't I?

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.