Treasury stock is a company’s previously issued stock that has been reacquired by the company in some way. The accounting treatment of treasury stock is a bit complex, but its main use is for companies to buy back their own shares to benefit shareholders.
What Is Treasury Stock?
When companies issue shares, they can later buy them back. The company holds these shares in its treasury stock account. Treasury stock does not have full voting rights and does not get any dividend payments. However, it can benefit the company in other ways. For example, the company can later sell the treasury stock and make a profit on the resale. Additionally, buying back treasury stock can help the company control how the stock is distributed, typically resulting in a share price increase in the market.
What Are the Benefits and Limitations of Treasury Stock?
Benefits
One of the main advantages of treasury stock is that it provides an easy way for companies to deploy capital for shareholder benefit. By buying back the stock, companies can increase the stock price, increase returns to investors, or reduce the amount of shares outstanding. This can help increase prospects of corporate acquisitions and can also help the company reduce its remaining debt.
Limitations
There are a few limitations to using treasury stock. First, the company must have the initial cash available to buy back the shares. Second, it must adhere to the regulations set forth by the SEC for stock repurchases. Finally, any losses realized on the sale of the treasury stock must be reported on the company’s tax returns.
Conclusion
Treasury stock can be profitable and beneficial to companies and shareholders alike. It can create value for shareholders by increasing the company’s stock price and providing additional returns. However, it is also important to be aware of the associated risks and limitations. Companies must ensure compliance with all applicable laws, as well as have sufficient capital to cover the costs of buying back the shares.