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. 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.
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.