Treasury stock is a term that is used to describe the amount of stock that a company keeps of its own shares. They keep the stock shares in the company treasury. This stock can be used for a variety of purposes and can affect individual traders as well. Here is a look at treasury stock and why it is significant to investors.

Treasury Stock

Treasury stock can be acquired in 2 different ways by a company. They can keep some of the shares that are created when they initially offer stock to the public. They can also go out into the marketplace and purchase stock from individual shareholders. Both methods accomplish the same end goal of keeping some of the company stock in their own possession. 

This type of stock does not have the same rights as traditional common stock. They do not pay dividends to this type of stock and this stock does not carry with it any voting rights in the company. When analysts calculate the number of outstanding shares for company, they should not include this number because the shares are not available to the market place.

Keeping Equity

One of the major objectives of keeping some treasury stock on hand is to keep some equity in the company. When a company has a large amount of treasury stock on hand, they do not have to worry about the possibility of hostile takeovers. Many companies will keep just enough stock on hand so that they can feel confident that they will always have control of the company.

Raising Cash

In some cases, the company will keep this treasury stock on hand as a backup plan. If they need to raise cash for some purpose, they can simply sell some of the treasury stock to the public. They will be able to sell the stock at the market place and generate some quick cash. This is faster than taking out a loan and they can quickly obtain the money that they need.

Effect on Investors

When a company releases treasury stock to the market place, it can have a negative effect on the rest of the shareholders. Many of the financial ratios that are used to value a company take into consideration the number of shares that are outstanding on the market. If the company suddenly increases the number of outstanding shares significantly without changing anything else, it can negatively impact the price of the stock on the market. This has the tendency to dilute the market and make the price of the stock decrease. Therefore, most existing shareholders will not like the idea of releasing treasury stock to the market place.

Buying Back

In some cases, companies will try to buy stock back from the market place. In most situations, they do this in order to raise the stock price in the market. This is the exact opposite of issuing shares as it lowers the number of outstanding shares in the market and eliminates dilution. 

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