Treasury stock refers to the amount of shares in a company that a publicly traded business chooses to keep out of the public stock pool for one reason or another. Perhaps they may have never issued this stock to be purchased in the first place or they may have bought it back off the public market for a specific purpose.
Understanding Treasury Stock
A company may choose to keep its own stock for a number of reasons. They could give it as a bonus for employees, keep it off the market in order to prevent devaluation, or hold it so that the company is the majority stake holder and not another corporation or person. In fact, there are a number of reasons, some of which are discussed here.
Offering Stock to Employees
Keeping treasury stock can be an effective way to provide a bonus or incentive for employees, as opposed to offering them a monetary compensation. This stock has a potential pay-out that is greater than the monetary value of the stock and therefore is often viewed as a better incentive for employees. This is especially true if the company is an established, reputable business with a high stock valuation. There are typically limits on how and when an employee can cash in their stock; most often it is directly proportionate to how long they've been employed by the company.
Keeping Devalued Stock off the Market
Having too many shares of stock on the market can be bad for a company. If the demand is too low, and too many shares are available, this will drive the price per share down. For this reason, companies may choose to keep stock in house, or to buy up shares that are already on the market in order to reduce the amount available to the public. By doing so, to a certain extent they are able to control demand and have some amount of say in the price at which their stock is valued.
Preventing a Takeover of the Company
The majority shareholder in a company, be it another business, a conglomerate, or a person, will technically have the control of that company. If such a threat exists a company will often purchase back their own stock so they can be the majority shareholders. Additionally, a company may never release all of its stock for this reason and opt to keep the majority of shares in-house so that a takeover threat never has the potential for becoming a reality.
Differences in Treasury Stock
This type of stock is different from traditional shares that anyone can buy on the stock market. Treasury stock does not give those who hold it a voting right in the company. In addition, it doesn't pay dividends nor does it entitle the holder to any assets if the company ends up being sold.
There are a number of things to consider when it comes to keeping stock within a company. It can be a good way to control the amount of stock on the market but it can also present restrictions and drawbacks for a business.