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Equity Securities

What is Treasury Stock?

When a company decides it needs to raise more money, it has a few ways of doing so. Aside from just increasing its profits, the company can either take on debt or issue more stock to new or existing shareholders to meet its cash flow needs.

But what happens when a corporation decides it doesn’t want more shareholders? What happens when a corporation decides it wants less shareholders?

When a corporation decides it wants less shareholders, for any reason, it can buy back stock from existing shareholders. The stock that the corporation buys is held in its treasury, therefore denoting it the name Treasury Stock.

What Rights, if any, Does Treasury Stock Have?

Because it is owned by the corporation and it no longer is in the hands of the shareholders, treasury stock loses a lot of the privileges and rights that it was granted when it was common stock. It no longer has voting rights and does not pay a dividend.

The reason being is, if it did pay a dividend, it would just be the corporation paying money back to itself.

What Happens to Treasury Stock?

The stock that a corporation buys back can be held, retired, or resold.

The reasons for buying back stock are endless. It may be that the corporation wanted to reduce the number of shareholders to take the company private, or perhaps the price of the stock dropped to a sufficient level that the company thought it would be a good move to buy the stock now for cheap and then attempt to resell it later when the prices rise again.

It’s always important to note when treasury stock is listed on a company’s financial statements, as it may indicate the corporation is readying itself for a strategic move, or is perhaps indicating its intentions.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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