Company Stock Buybacks: Good or Bad?

Company stock buybacks sound innocent enough: a stock buyback occurs when a company repurchases its own shares.

But the effect is insidious. Buybacks inflate paper profits without producing anything of tangible value -- which means earnings will be inflated and misleading to investors.

That's why Money Morning Capital Wave Strategist Shah Gilani accuses buybacks of being a large part of the "financial engineering" going on in U.S. markets right now.

More than $6.9 trillion has gone into stock buybacks since 2004 according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network. And according to Goldman Sachs, stock buybacks will surge by 18% this year, exceeding $600 billion and accounting for nearly 30% of total cash spending.

In the following video, Gilani explains exactly how company stock buybacks work -- and how investors can make money in the buyback game:

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