Treasury stock

DEFINITION of treasury stock

A treasury stock or reacquired stock is stock which is also bought back by the issuing company, reducing the amount of outstanding stock on the open market.

WHAT IT IS IN ESSENCE

It represents the portion of a company’s shares that it keeps in its own treasury. The shares do not count towards the total amount of outstanding shares listed.

And neither pay dividends nor carry voting rights (because a company cannot pay itself, or own itself).

It is stock which issuer repurchased and intends to use it for retirement or resale to the public. Also, it represents the difference between the number of shares issued and the number of shares outstanding.

Usually, treasury stock is either keep back from the public when a company lists or buy back from shareholders as part of a buyback.

A buyback reduces the number of available shares in a company and can have the effect of driving up its share price.

If a company is holding treasury stock, it has to be on the list of the equity in the balance sheet.

The United Kingdom equivalent of treasury stock as used in the United States is treasury share. Treasury stocks in the UK refers to government bonds or gilts.

HOW TO USE

It consists of shares issued but not outstanding. Thus, treasury shares are not included in earnings per share or dividend calculations.

So, they do not have voting rights.

In general, an increase in treasury stock can be a good thing. The reason is it indicates that the company thinks the shares are undervalued.

By buying back its stock, a firm reduces the number of shares outstanding. This, in turn, gives each shareholder a larger piece of earnings. Likewise, the lower number of shares can improve ratios.

However, treasury stock can be abused. Managers who repurchase shares solely to increase ratios are violating their fiduciary duty to the shareholders.