Definition: Treasury stock is the corporation’s shares that were reacquired by the corporation. In other words, treasury stock is common stock that was issued to investors and then repurchased by the corporation.
What Does Treasury Stock Mean?
Treasury stock is similar to unissued shares in that neither is considered an asset of the company. Also, neither treasury nor unissued stock receives dividends or has voting privileges. Since a corporation can’t be its own owner, the only real difference between a treasury share and an unissued share is that one was once issued and the other wasn’t.
You might be wondering why a corporation would ever want to buy its own shares back. What sense does that make? Why did they issue them in the first place? There are several main reasons why the board of directors might consider purchasing some of the outstanding shares from current investors.
Example
The first reason is for compensation purposes. Many executives get paid with stock options or rights to purchase shares in the future. The company might purchase outstanding shares to reissue them as compensation later on.
The second reason is to use the stock in another purchase. Some mergers and buyouts require equity financing and often times the company being merged is paid out with stock instead of cash. If there isn’t enough unissued shares for a buyout, the board might purchase some treasury stock.
The third reason is to protect the business from a hostile take over. If an investor or group of investors is purchasing large amounts of stock with plans to upset the company, the board might move quickly to purchase additional outstanding shares in order to defeat the takeover.
The last main reason for a board to consider purchasing outstanding shares is to maintain a strong market price. Sometimes too many shares can dilute investors’ confidence and the price can fall. By maintaining a smaller quantity of shares outstanding, management may effectively be able to maintain the stock price.
