Treasury stocks are reacquired or repurchased stocks. When a company buys back its shares from the market from existing shareholders, the shares so acquired are called treasury stocks.
Treasury stock is then held by the company to be used as per its discretion. The company can hold onto the stock market, sell it later on, or retire it altogether.
Importance of treasury stock for investors
- Improvement in market value
If the market value of a company’s stock is falling, the company can buy back its shares and convert them into treasury stock. This buying back increases demand and, thus, helps in improving the market value of the share. So, for existing investors, conversion to treasury stock can increase the overall valuation of their shares.
- Enhancement of ratios
As the quantum of outstanding shares reduces, the return on assets and equity ratios increases, thereby enhancing the company’s financial position. This is better for investors as an improved financial position of the company boosts the market value of shares.
Features of treasury stocks
- Initially, treasury stocks are part of the outstanding shares of a company; when they are repurchased, they become treasury stocks
- Treasury stock does not have any voting rights or rights to receive dividends
- Treasury stock is not entitled to receive any part of the company’s assets at the time of liquidation
Why do companies buy back shares?
- To boost the demand of its stock in a falling market so that the fall in the stock prices is controlled
- To buy back the stock at reduced prices and then sell the stock at a later date when prices improve
- To counter hostile turnovers by increasing the controlling interest in the overall stake holding of the company
- To retire a part of the outstanding shares altogether
How can companies buy back stocks?
Following are the three main options for companies to buy back their shares and convert them into treasury stock:
- Directly through the stock exchange
- By introducing a tender offer wherein a company makes an offer to its existing shareholders to buy their shares at a specified price (usually above the market price) for a specific duration. Shareholders who agree to sell their shares can do so, and the buyback happens.
- Through Dutch auction, a company offers its shareholders an offer to buy back a specified number of shares; the price range is also mentioned. Shareholders then submit their bids, and the company chooses the best offer and buys back the shares.
As an investor, it is important to know the meaning of treasury stock, how it impacts the stocks to buy today, and how you can participate in the buyback. You could also consult a financial expert to guide your investment decisions based on your financial goals and risk appetite.