Treasury stock definition
/What is Treasury Stock?
Treasury stock is shares in a company that the issuer has reacquired. The issuing company may then retire the stock or resell it at a later date. When calculating the number of shares issued and outstanding, which are reported in a company's financial statements , treasury stock is classified as issued, but it is not outstanding. Treasury stock is also not included in the calculation of a company's earnings per share , does not pay a dividend , and does not have a vote at a shareholders ' meeting. The amount of cash paid to buy back treasury stock is recorded in a contra equity account that appears in the equity section of the balance sheet .
Advantages of Treasury Stock
Companies buy back shares in order to prop up their stock price by creating artificial demand. A stock buy back is also useful for transferring money to shareholders without using a dividend. Certain investors may demand a stock buyback, if they believe that a company is not properly deploying its available funds. Yet another reason to repurchase shares is to eliminate the holdings of smaller investors , so that a public company can reduce the total number of investors and thereby take itself private.
Disadvantages of Treasury Stock
A business that buys back shares usually does so because it has excess cash. This situation most commonly arises when a firm is experiencing robust financial performance; this being the case, its share price is probably quite high. Buying shares at a high price is not an efficient use of company resources, since it does not result in many shares being retired in exchange for the amount of cash being paid out.