Treasury stocks are shares in a company that are not available to the public.
Companies can obtain treasury stocks in one of two ways: 1. Repurchasing them from the market 2. Never initially issuing them after going public.
Why companies repurchase treasury stocks Companies may decide to repurchase treasury stock for a number of reasons.
One reason is to reduce the number of shares in circulation. Reducing the number of shares in the market can increase the value of shares in the market.
Another reason companies may buy treasury stock is to reduce the number of shareholders in the company. When a company holds the majority of the shares, it has more control over significant decisions impacting the company. In addition to that, it protects the company from hostile takeovers, which could happen if there are numerous external shareholders in the company.
A third motive for repurchasing treasury stock is that a company pays fewer dividends given that there are fewer shares in circulation.
A fourth reason why companies buy treasury stocks is that they may view them as an investment opportunity. When the price of a company’s stock is low, companies could opt to purchase them in order to sell them at a higher price in the future.
What companies do with treasury stocks A company may choose to retire treasury stock or hold onto it.
Retiring treasury stock ultimately increases the value of current stocks in circulation, but makes it more difficult to raise capital in the future. That’s because once treasury stocks are retired, the company cannot reissue them without a shareholder vote.
Holding onto treasury stock could allow the company to include stocks in compensation packages, raise capital in the future, or as a war chest for future mergers and acquisitions.