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: