treasury stock

Definition of Treasury Stock

Treasury stock is the term used to designate shares of stock that have been repurchased by the issuing corporation from its existing shareholders. Formerly these stock certificates were stored in a special fund known as the Treasury, hence the term Treasury Stock. Treasury stock is important to shareholders, as it directly affects their proportionate ownership in the corporation.

The initial repurchase of treasury stock is a way in which corporations can reduce the number of issued and outstanding shares in the market. This is beneficial to both the company and the shareholders. Corporations benefit from reducing treasury stock by increasing their short-term earnings and stock price, since reported earnings per share increase as the number of outstanding shares decline. Increases in the EPS will directly affect the share price, and reward investors with stock price appreciation. Additionally, the reduction of outstanding shares gives management more freedom to pay dividends and conduct stock splits and reverse stock splits as deemed fit for the company.

For shareholders, a decrease in shares out reduces the chances of dilution when the company issues additional shares in the future, thereby increasing the shareholder’s percentage ownership in the company. As a result, when a company reports higher EPS and subsequently, an increase in the stock price in response, shareholders can be delighted with the fact that the company they are currently invested in is actually worth more than they thought it was.

Treasury Stock, however, can be bad news for shareholders in certain circumstances. For instance, when a corporation repurchases too much of its stock, it can lead to excessive lending by the company, thus decreasing the ability of the company to make investments or expand operations. Also, if the company has excess treasury stock, it could potentially lead to stock price declines as investors are led to believe that the repurchased shares were worth less than earlier indicated by the market. Additionally, when a corporation repurchases its stock for too high of a price, often shareholders can be discouraged by what appears to be a waste of company resources.

In short, treasury stock is an important tool used when a company needs to reduce the number of shares outstanding, but it should not be used as a short-term tool to increase stock price. If used incorrectly, treasury stock can frequently be damaging to the shareholders, and even potentially lead to a decrease in stock price. Therefore, any repurchases of treasury stock should be carefully considered by the company’s board of directors, taking into account market conditions, the current value of the stock and the long-term goals of the company.

A stock repurchase, also sometimes known as a share buyback, is a way for a company to repurchase its own shares from investors on the open market. This buyback of the companys own shares can be done for a variety of reasons, the most common being to increase the companys stock price. Repurchasing shares reduces the number of outstanding shares, thereby increasing a companys earnings per share.

Companies may issue a formal notice allowing stockholders to tender a portion or all of their shares back to the company, at a specific price, during a certain period. This is known as a tender offer. If a company chooses to do a buyback on the open market, they purchase shares at the current market price.

In the U.S. when a company decides to repurchase shares, it must make the announcement via a public filing with the SEC (Securities and Exchange Commission). Companies that repurchase shares set limits on how much of the company can be bought back, including the maximum dollar amount that can be spent.

There are several reasons a company may choose to repurchase shares, such as the desire to increase their stock price, achieve balance sheet flexibility and growth, and to reward shareholders. A repurchase also increases the proportion of ownership of the existing shareholders, by providing them with a premium over the current market price.

When a company repurchases stock, it generally means that they think their shares are undervalued. This makes sense; if the company believes that the stocks are still worth more than the current market price, it should take advantage of the opportunity and buy them up at a discount. The companys management may also believe that their own stock price is not accurately reflecting the true value of the company and that, by buying back shares, they can improve the perceived value of the company, while also helping the bottom line.

Finally, companies may repurchase their own stocks to show confidence in their own abilities and to encourage growth and development. A repurchase of shares communicates to the stock market that the company is optimistic about its future and that shareholders should expect an increase in value. This kind of attitude also demonstrates to potential investors that the company is serious about growth and performance.