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.