When a business becomes incorporated it issues a certain amount of stock, which can be divided into a certain number of shares as specified by the company’s charter. A charter is a legal document that lays out the rules of how a company can be run. Unissued stock is an amount of stock that the company can issue but has not. Conversely, treasury stock is stock that the company has issued, sold and then bought back.
Charters and Stocks
An incorporated company can issue shares of company stock. The amount and type of stock that can be issued depends on the size, type and value of a given company. Stock represents ownership in the company and is divided into units called shares.
Unissued stock refers to the number of shares that the company can legally create according to its charter, but has chosen not to. Companies often issue stock in several stages; a corporation can manage their stock in a myriad of ways, and unissued stock represents financial options. Every time a company issues more shares, it dilutes the amount of ownership that each share represents.
When a company buys its own shares on the market at market price, the shares become treasury stock. This action is often called a buy back. Treasury stock is stock that has been issued, sold into the market and then repurchased by the issuing company. Corporations may have one of many reasons to buy back stock, and can accomplish several objectives with treasury stock.
Uses for Treasury Stock
Financial news website The Motley Fool reports that treasury stock is most commonly used for one of two things. Companies issue stock options to employees as an extra benefit, and often have to buy shares off the market to meet the obligations of the options. Options are contracts that give the holder the right to buy shares at a set price within a set amount of time. Corporations can also buy back shares and retire them, which means that the shares disappear and cannot be reissued. Retiring shares raises the amount of ownership that each existing share represents.