Why do companies conduct a stock buyback?

Companies conduct stock buybacks primarily to reduce the number of outstanding shares in the market. This reduction can have several beneficial effects. First, by buying back shares, a company can help increase the earnings per share (EPS), as the same amount of earnings is spread over fewer shares. This can make the stock more attractive to investors, potentially leading to a higher stock price.

Additionally, a reduction in outstanding shares can improve ownership percentages for remaining shareholders and often signals to the market that the company believes its stock is undervalued. This positive sentiment can further support the stock price.

In contrast, the other options reflect purposes that are not typically associated with stock buybacks. Increasing stock market volatility is not a goal of buybacks, and while dividends are another way to return value to shareholders, buybacks are different in their mechanism and implication. Lastly, raising funds for new investment opportunities is not directly related to stock buybacks, as this action generally involves utilizing existing cash reserves rather than generating new capital.