Treasury Stock

Description of Treasury Stock. Explanation.

Definition Treasury Stock. Description.

Treasury Stock are issued shares that have been reacquired by the issuing corporation from its stockholders; it is no longer outstanding.

Like unissued stock, it cannot be voted and it does not pay nor accrue dividends. Furthermore it is not included in any of the ratios measuring value per share, such as earnings per share.

These shares may be held by the company indefinitely, reissued to the public or retired. The reacquisition can take place by purchase, gift, donation, inheritance or other means. The maximum amount of treasury shares is limited to 5% of the total market cap.

On the balance sheet, treasury stock is listed under shareholder equity as a negative number.

Reasons why treasury stock is created include:

Providing a non-taxable benefit to the shareholders: unlike taxable dividends, due to buying back shares, the share price is likely to increase.
To provide for employee stock options, subscription rights, warrants, convertible bonds, or convertible preferred stock.
As an anti hostile takeover mechanism.
To improve the debt to equity ratio by issuing bonds to pay the reacquisition of the treasury shares.
When companies feel that their stock is undervalued on the open market, to try to increase the stock price.