About Treasury Stock

Treasury stock consists of a company's stock that has been repurchased by the company. This stock if not retired is recorded as "treasury stock" in the balance sheet under the "Stockholder's Equity" section. Treasury stock is not considered to be a part of the outstanding stock. They have various limitations and the company is allowed to re-issue, retire or hold on to the stock, as it deems fit. This article outlines some of the main reasons the companies choose to have treasury stock and the limitations of such stock.

Significance

The company may decide to repurchase its stock and hold it as treasury stock for various reasons. One of the main reasons is to improve its earnings per share. By reducing the number of shares outstanding in the market, the earnings per share will show an increase.

Prevention of Takeovers

Another main reason for repurchasing the stock is to prevent hostile takeover attempts by reducing the number of shareholders.

Employee Stock Option

Stock is also repurchased to fund the employee stock option programs (ESOP) and retirement programs. Once repurchased, the treasury stock can be converted to stock options to meet the requirements of the employee stock option plan.

Reinvest

The companies may also repurchase stock as a means to invest excess cash holdings. This allows them the flexibility to re-issue the stock at a later date at a better price.

Limitations

Treasury stock has various inherent limitations. They do not carry voting privileges for the company, nor are they eligible for dividend earnings. They are not considered a part of the outstanding shares, but can be held indefinitely and can be re-issued or retired at any time. Once sold the stock carries all the rights and privileges as other regular outstanding stock.

Resources

• Treasury Stock