How do share redemptions and repurchases differ?

When a company wants shareholders to turn in a portion of their shares for a cash payment, it has two options: it can redeem or repurchase the shares.

Share repurchases are when a company that issued the shares repurchases the shares back from its shareholders. During a repurchase or buyback, the company pays shareholders the market value per share. With a repurchase, the company can purchase the stock on the open market or from its shareholders directly. Share buybacks are a popular method for returning cash to shareholders. 

Redemption is when a company requires shareholders to sell a portion of their shares back to the company. For a company to redeem shares, it must have stipulated up front that those shares are redeemable, or callable. Redeemable shares have a set call price, which is the price per share that the company agrees to pay the shareholder upon redemption. The call price is set the onset of the share issuance.

A company may choose repurchase over redemption for several reasons. When the stock is trading below the call price of redeemable shares, the company can obtain the shares for a lower cost per share by buying them from shareholders through a stock buyback. The company might offer, as an incentive, to repurchase the shares at a higher price than the current market, but below the call price of the redeemable shares. 

A company might repurchase shares with the goal of reducing outstanding shares, which increases earnings per share or EPS. As a result, a repurchase typically drives a stock price higher by reducing the supply of outstanding shares. When the stock price is low, the company might also adopt a buy-low, sell-high strategy and earn a profit on the resale of the shares at a later date.

Sometimes the company buys back enough of its shares to regain majority shareholder status, which is obtained by owning more than 50% of the outstanding shares. A majority shareholder can dominate voting and exercise heavy influence over the direction of the company.

A company has issued redeemable preferred stock with a call price of $150 per share and has chosen to redeem a portion of them. However, the stock is trading at $120 in the market. The company's executives might choose to repurchase the shares rather than pay the $30-per-share premium associated with the redemption. If the company is unable to find willing sellers, it can always use the redemption as a fallback.

Conversely, if a company currently pays a 3% dividend rate on shares outstanding but has redeemable shares outstanding that carry a higher dividend rate, the company might elect to redeem the more expensive shares, with the higher dividend rate. One advantage to issuing redeemable shares is that it gives a company flexibility if they choose to buy back shares at a later date.

Companies can sometimes buy and sell stock like investors. If a company's executive management believe their stock is undervalued, they may choose to buy back shares at the perceived-discounted price. If the stock price appreciates in the future, the company has the option of issuing shares at the higher price per share, earning a gain from the sale when compared to the original repurchase price.

A repurchase involves a company buying back shares, either on the open market or directly from shareholders. Unlike redemption, which is compulsory, selling shares back to the company with a repurchase is voluntary. However, a redemption typically pays investors a premium built into the call price, partly compensating them for the risk of having their shares redeemed.

For more on repurchases, please read "Why Would a Company Buy Back Its Own Shares?"