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

There are several advantages to having treasury stock, which are as follows:

Increase the stock price. Companies buy back shares in order to prop up their stock price by creating artificial demand.
Pay cash to investors. A stock buy back is also useful for transferring money to shareholders without using a dividend.
Improve investor relations. Certain investors may demand a stock buyback, if they believe that a company is not properly deploying its available funds.
Eliminate small investors. A stock buyback can be used 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.