Treasury stock definition

What is treasury stock?

Treasury stock is the portion of a company’s shares that it keeps in reserve. In other words, the shares that are not available to the public and do not count towards the total amount of outstanding shares listed.

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What happens to treasury shares?

Typically, treasury shares are either kept back from the public when a company lists or have been repurchased from shareholders as part of a buyback. If a company is holding treasury stock, it can be found listed on the equity part of its balance sheet.

Treasury shares don’t pay dividends nor carry voting rights. This is because the stock loses most of its value when it is withdrawn from the outstanding allotment – if the company decides to reissue the shares, they regain their value.

Why do companies buy back shares?

A company might choose to buy back shares for a number of reasons, but the main one is to reduce the number of shares in circulation. When there is a reduced supply, demand usually increases because there is a higher earnings per share ratio. This increased demand means that the share price could go up.

Treasury shares example

Let’s say company ABC has an equity balance of $900,000 and 5000 treasury shares. It also has 200,000 shares in circulation. However, it believes its stock is undervalued and so decides to buy back 10,000 of its own shares to increase demand and raise the share price.

The current cost per share is $5, so ABC is buying back shares to the value of $50,000. This means $50,000 will be deducted from the company’s cash balance, while the treasury stock will increase by 10,000. The balance sheet now reflects a new equity value of $850,000 and ABC now has 15,000 treasury shares.

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