Lower share prices can sometimes offer great buying opportunities to investors. But even with no cash on the sidelines, a falling stock market could still help me get rich.
Falling share prices
A lot of shares have seen significant price declines this year. Three examples from my portfolio are Alphabet, Meta, and Rightmove.
Shares in Alphabet (the parent company of Google) have fallen by around 25% since the beginning of January. From a share price of $2,901, the stock is now at $2,165.
Meta Platforms (the company that owns Facebook) has fallen even further. Having started the year at $338, the shares now trade 44% lower at $191.
Lastly, Rightmove shares started the year at £7.90. Today, they are trading at £5.85, which is 26% decline.
If I had cash to deploy, I’d be adding to my investment in any of these at today’s prices. But even without spare cash to invest, lower share prices can be good for me as an investor.
Share buybacks
Alphabet, Meta, and Rightmove are all repurchasing shares. When a business buys back stock, the number of outstanding shares goes down, causing the amount of the overall business that each shareholder owns to increase.
Suppose that a company has 100 shares outstanding and I own one of them. That gives me a 1% ownership stake in the operation.
If the business buys back three shares, the share count reduces to 97 and my ownership increases to 1.03%. Repurchasing 12 shares reduces the share count to 88 and increases my stake to 1.14%.
In other words, the more shares a company repurchases, the more my ownership as a shareholder in the business increases.
Buybacks at lower prices
Lower share prices allow companies to buy back more of their shares, increasing the amount of the overall business that each shareholder owns by more. Take Meta as an example.
Over the last year, Meta has spent around $50bn on buybacks. With a current market cap of $517, if it does this again in the next 12 months, then the share count will reduce by 9.67% and my ownership in the business will increase by around 10%.
If Meta’s share price falls, though, the company can buy back more stock with its $50bn and my stake will increase by more.
A 5% share price decline reduces Meta’s market cap to $491bn. Spending $50bn on buybacks at these levels would reduce the share count by just over 10%, increasing my ownership in the business by 11%.
Furthermore, if a falling stock market pushes Meta’s share price down 20%, then the company’s market cap will fall to $413.6bn. Buying back $50bn at this price would reduce the share count by over 12% and increase my ownership stake by nearly 14%.
Summary
Lower prices allow companies to buy back more of their stock, enhancing the amount by which my ownership of the businesses increases. That’s why falling share prices could help me to get rich even with no cash on the sidelines.
Crucially, though, I can only benefit from significant share buybacks if I own the stocks. That’s why the most important thing for me, as an investor, is to avoid selling shares when prices are coming down.
