Definition: Shares of its own stock that a company has purchased from investors to take them out of circulation and reduce the number of shares that are outstanding.
Example: A company has 2,000,000 shares outstanding. It purchases 100,000 shares back from investors. There are now 1,900,000 shares outstanding and 100,000 in the company’s Treasury.
Investeach explains: Shares that the company purchases and places in its Treasury are considered to be out of circulation. The one vote per share an owner is normally entitled to cast is suspended. In addition, shares in the Treasury are not entitled to receive dividends. This loss of privileges shows that a company isn’t really owning itself. However, an argument can be made, as discussed below, that a company purchasing its shares may actually be making an investment in itself.
Should conditions for a company change in the years after a purchase, if it hasn’t chosen to cancel the Treasury shares, it may re-issue them as opposed to issuing new shares. If the price it can get for these re-issued shares is higher than it paid to purchase them, it can say that it made a profit on its investment in its own shares.
Riddle me this:
1. What is one reason why a company may purchase its own shares?
2. Why are Treasury shares different than shares owned by someone other than the company?
3. What argument can we make for claiming that companies which purchase their own shares are making an investment in themselves?