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In finance, a treasury stock or reacquired stock is stock which is bought back by the issuing company. It reduces the amount of outstanding stock s on the open market. On the balance sheet, treasury stock is listed under Shareholder Equity. Sometimes, companies do this when they feel that their stock is undervalued on the open market.Limitations of treasury stock include:
- Treasury stock does not pay dividend
- Treasury stock has no voting rights
- Total treasury stock can not exceed 5% of total capitalization
After buyback, the company can either retire the shares or hold the shares for later resell. Buying back stocks reduces outstanding shares, thus it can cause the value of outstanding shares to appreciate. In addition, it can serve as a signal to investors.
In the US, the Companies Act of 1955 dissallowed companies from holding their own shares. However, the Companies Act of 1993 later repealed this.
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