Treasury stock or treasury shares
Treasury stock also known as treasury shares. When a company acquires its shares either by way of buyback or when shares are initially created but not issued to the public.
In other words, when an issuing company buys back its stock or shares on its name to hold it or resale it after some time then such shares are known as treasury shares. After the buyback of the treasury shares, the share capital of the issuing company decreases.
Features of treasury shares
- Treasury shares are not entitled to dividends.
- No voting rights
- No claim at the time of liquidation.
- No inclusion in the calculation of market capitalization.
What is the difference between treasury shares and retired shares?
- When a company buys back its shares on its name and holds it then such shares are known as treasury shares, whereas when a company buys back its shares and destroyed it then such shares are known as retired shares.
- Treasury stock can be retired (canceled) or resale in an open market whereas retired shares are permanently canceled.
- Treasury shares can be reissue but retired shares never can be reissue.
What are the similarities between treasury shares and retired shares?
- Both treasury shares and retired shares don’t receive dividends.
- Treasury shares and retired shares don’t have any voting rights and ownership.
- Both treasury shares and retied shares not included in the calculation of outstanding shares.
Meaning of some terms used in this article
1. Authorized Shares – The maximum number of shares a company allows to issue.
2. Issued shares – The total number of shares a company has ever issued.
3. Outstanding shares – The total number of shares currently held by investors.
Accounting treatment for treasury stock or treasury shares –
- Treasury stock represents the number of shares repurchased from the open market it reduces shareholders' equity by the number of treasury shares.
- Treasury stocks are shown as a “negative figure” under the capital in the balance sheet.
- Treasury shares are shown at historical cost or par.
- Treasury stock is a contra entry equity account.
How to calculate treasury shares / Formula for calculating treasury shares -
Total number of shares issued = XXX
(-) Total number of outstanding shares = (XXX)
Number of treasury shares = XXX
What is “negative treasury stock”?
We know when issuing the company acquires its shares from the open market and hold it then those shares become treasury shares or stock. Treasury shares appear at cost or par value in the shareholder's equity section of the balance sheet as a “negative figure”.
Are treasury shares included in the market cap?
We know that,
Market capitalization = shares outstanding × price per share
Where share outstanding = the total shares of common stock issued (excluding those hold as treasury shares)
Therefore, we can say that
Market cap = [the total shares of common stock issued – treasury shares] × price per share
Hence proved, treasury shares are not included in market cap.
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What is "Negative treasury stock
Treasury Stock is a contra equity item. It is not reported as an asset; rather, it is subtracted from
stockholders' equity. The presence of treasury shares will cause a difference between the number of
shares issued and the number of shares outstanding
Effects of treasury stock on retained earnings -
When a corporation buys back some of its issued and outstanding stock, the transaction affects retained earnings indirectly. The cost of treasury stock must be subtracted from retained earnings, reducing amounts the company can distribute to stockholders as dividends.
Treasury stock financing or investing activity?
The purchase of treasury stock results in a decrease in stockholders' equity. Changes in stockholders' equity and long-term liabilities are shown in the financing activities section of the statement of cash flows. The purchase of Treasury Stock will cause a decrease in cash from financing activities.
Methods of buyback of shares of stock in the USA -
1. Open market stock buyback
A company can buy back its shares own shares directly from the open market. Buyback through this method does not impose any legal obligations on a company to complete the buyback program. Thus, a company enjoys the flexibility to cancel the stock buyback program at any time. The primary advantage of the open market stock buyback is its cost-effectiveness because a company buys back its shares at the current market price and doesn't need to pay the premium.
2. Fixed-price tender offer
In the Fixed-price tender offer method, the company makes a tender offer to the shareholders of the company to buy back the shares on a fixed date and at a fixed price. The price of the tender offer almost always includes the premium relative to the current share price. Then, those shareholders who are interested in selling their stocks submit the number of shares for sale to the company.
3. Dutch auction tender offer
In a Dutch auction tender offer method, a company makes a tender offer to the shareholders of the company to buy back shares and provides them a range of possible prices, with setting the minimum bid price. Then, the shareholders make their bids by specifying the number of shares and the minimum price at which they are willing to sell their shares.
4. Direct negotiation
Under this method of buyback, a company directly approaches to one or more shareholders of a company to buyback of shares from them. For that company offers them purchase price including premium. The important benefit of the method is that a company can negotiate the purchase price directly with the shareholders.
Reasons for buyback of shares / why company buy back its shares or stocks?
- to improve the earnings per share
- to improve return on capital, return on net worth and to enhance the long-term shareholder's value
- to provide an additional exit route to shareholders when shares are undervalued or thinly traded
- to enhance consolidation of a stake in the company
- to prevent unwelcome takeover bids
- to return surplus cash to shareholders
- to achieve optimum capital structure
- to support share price during periods of sluggish market condition
- to serve the equity more efficiently.