Treasury stock: Overview, definition, and example
What is treasury stock?
Treasury stock refers to shares that were once issued and outstanding in a company but were later repurchased by the company itself. These shares are not considered when calculating earnings per share or dividends, and they are held by the company in its own treasury. Treasury stock may be reissued or retired in the future.
For example, if a company issues 1,000 shares to investors and later buys back 200 shares, those 200 shares are considered treasury stock. They are still part of the company's total stock but are no longer in circulation for trading or paying dividends.
Why is treasury stock important?
Treasury stock is important because it can help a company manage its capital structure. By repurchasing its own shares, a company can reduce the number of shares outstanding, which may increase the value of the remaining shares. Additionally, companies might buy back shares to have them available for employee stock options or to improve financial ratios like earnings per share.
It’s also a way for a company to demonstrate confidence in its financial position by buying back its own stock, potentially increasing investor trust.
Understanding treasury stock through an example
Let’s say a company, ABC Corp., has 10,000 shares outstanding. The company decides to buy back 1,000 shares to reduce the number of shares on the market and increase the stock price. After the repurchase, ABC Corp. holds 1,000 shares in treasury stock. These shares are not counted toward dividends or earnings per share calculations.
In another example, XYZ Inc. buys back 500 shares after a successful quarter, keeping them as treasury stock for future use in employee stock compensation plans. The company may decide later to reissue these shares to the market if it needs capital or to distribute them among employees.
An example of a treasury stock clause
Here’s how a clause related to treasury stock might appear in a company’s corporate bylaws or shareholder agreement:
“The company may, from time to time, repurchase its own shares and hold them as treasury stock. The shares held as treasury stock shall not have voting rights, and no dividends shall be paid on such shares unless reissued.”
Conclusion
Treasury stock refers to shares that a company buys back from the market and holds for future use. It provides flexibility for managing capital, improving financial ratios, and issuing stock options or dividends in the future. For businesses, understanding and managing treasury stock effectively can help improve stock value and provide strategic options for future growth or employee compensation.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.