Treasury stocks are shares that were once part of a company’s outstanding shares but were later bought back by the company. Unlike regular shares, they don’t offer voting rights or dividends and aren’t counted in earnings. The company can hold, resell, or retire these shares.
Content:
- What Is Treasury Stock?
- Treasury Stock Example
- How To Calculate Treasury Stock? – Treasury Stock Formula
- How to Invest in Treasury Stocks in India?
- Treasury Stock Vs Common Stock
- What Is Treasury Stock? – Quick Summary
- Treasury Stock – FAQs
What Is Treasury Stock?
Treasury stock is when a company buys back its own shares from investors. This can happen through open market purchases or direct buybacks from shareholders. These repurchased shares lose certain features – they don’t pay dividends or have voting rights.
There are several reasons why a company might reacquire its shares. It can help increase the stock’s value, making it more attractive to investors. It also prevents other companies from gaining too much control. Additionally, these shares can be used in employee compensation plans, offering them as part of their benefits.
Treasury Stock Example
Tata Consultancy Services (TCS), a major Indian IT firm, repurchased 2 million shares at ₹2,500 each, converting them into treasury stock. These shares, now unavailable for public trading, may be used for employee stock plans or sold later for strategic reasons.
How To Calculate Treasury Stock? – Treasury Stock Formula
The calculation of treasury stock is straightforward: Treasury Stock = Number of Shares Repurchased x Repurchase Price.
To break it down:
- Determine the number of shares repurchased: This is the total count of shares a company has repurchased.
- Identify the repurchase price: This is the price per share paid by the company to buy back the shares.
- Multiply the two values: The product of the number of shares repurchased and the repurchase price gives the total cost of the treasury stock.
How to Invest in Treasury Stocks in India?
To invest in treasury stocks in India, look for companies expected to repurchase shares. Focus on their financial health and growth potential, which are key indicators of profitable investments.
Here are the steps to invest:
- Research companies performing buybacks: Look for companies announcing share buyback plans.
- Monitor share prices: Observe the price movement before and during the buyback period.
- Evaluate the buyback terms: Understand the buyback price and how it compares to the current market price.
- Consider the long-term perspective: Assess the company’s fundamentals and future growth potential.
- Consult with a financial advisor: Get professional advice to make informed decisions.
Treasury Stock Vs Common Stock
The main difference between Treasury Stock and Common Stock is that Treasury Stock represents shares that a company has repurchased and held in its treasury. In contrast, common stock refers to shares owned by shareholders and actively traded in the market.
| Parameter | Treasury Stock | Common Stock |
| Voting Rights | Does not confer any voting rights. | Shareholders typically have voting rights. |
| Dividend Rights | Does not earn dividends. | May earn dividends. |
| Impact on Shareholder Equity | Decreases total shareholder equity (recorded as a contra-equity account). | Contributes to shareholder equity. |
| Market Availability | It is not available for public trading and is held by the company. | Available for public trading on stock exchanges. |
| Financial Statement Representation | Recorded as a deduction from total equity on the balance sheet. | Listed as part of shareholder equity at its par value. |
| Purpose of Issuance/Repurchase | Repurchased for various strategic reasons like boosting stock value or for employee compensation. | Issued to raise capital for the company. |
| Risk and Return Profile | There is no market-related risk as it is not traded; and does not offer returns. | It depends on market conditions and company performance; it offers potential returns. |
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What Is Treasury Stock? – Quick Summary
- Treasury stocks are the shares reacquired by a company and held in its treasury, not conferring voting rights or dividends.
- Treasury Stock Calculation: Calculated by multiplying the number of shares repurchased with the repurchase price (Number of Shares Repurchased x Repurchase Price)
- Investing in Treasury Stocks in India focuses on strategic analysis of companies likely to convert outstanding shares into treasury stock.
- Treasury stock are shares a company has repurchased and held in its treasury, while common stock is owned by shareholders and traded in the market.
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Treasury Stock – FAQs
1. What Is Treasury Stock?
Treasury stock consists of a company’s own shares that have been reacquired and are held in its treasury. They are not a part of the actively traded stock and do not carry voting or dividend rights.
2. What is an example of a treasury stock?
An example of treasury stock is when a company like TCS repurchases its shares, reducing the total number of shares in the market and holding them as treasury stock.
3. What is the difference between common and treasury stock?
The main difference is that common stock offers voting rights and potential dividends, while treasury stock, being held by the company, offers neither.
4. Why is treasury stock used?
Treasury stock is used to control the number of shares in the market, potentially increase the stock’s value, and for strategic purposes like employee compensation plans.
5. Is Treasury Stock An Asset
No, treasury stock is not considered an asset; it’s a contra-equity account on the balance sheet, reducing the total shareholder equity.
6. What is the treasury stock formula?
The treasury stock formula is Treasury Stock = Number of Shares Repurchased x Repurchase Price.
7. What is the difference between a buyback and a treasury stock?
The main difference is that a buyback refers to a company repurchasing its shares from the market, while treasury stock is the result of this process, representing the repurchased shares held by the company.
8. Why is it called treasury stock?
It is called treasury stock because, after repurchasing, these shares are held in the company’s treasury, essentially being taken out of circulation in the stock market.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
