Treasury Stock for Dummies

Treasury Stock refers to shares of a company's own stock that has been issued and then subsequently repurchased by the company itself. It's like when you decide to save some of your allowance money by putting it in a piggy bank. The piggy bank is your own personal "treasury stock" of money. In the same way, a company uses treasury stock as a way to save some of its own shares for later use.

When a company buys back its own stock, it takes those shares out of circulation in the stock market. It's kind of like when you take some cookies out of the cookie jar and put them aside for later. The company keeps these shares in its "treasury," or its own stash, to use for various purposes in the future.

There are a few reasons why a company may decide to buy back its own stock. One reason is when the company believes that its stock is undervalued, or priced lower than it should be. It's like when you see a toy at the store that you think is really cool but is on sale for a lower price because not many people want it. The company might think that its stock is a good deal, so it buys it back to hold onto it until the price goes back up.

Another reason why a company might buy back its own stock is to use it for things like employee stock options or equity-based compensation plans. It's like when your parents give you some extra cookies that you can use to trade with your friends for their toys. The company can give these treasury stock shares to its employees as part of their compensation package. It's a way for the company to reward its employees and make them feel like they are part owners of the company.

Sometimes, companies may also repurchase their stock as a way to artificially increase the demand for their shares and boost the stock price. It's like when you have a really cool toy that all your friends want to have, so they start asking you if they can buy it from you. The company can buy its own stock to make it seem more valuable and attractive to other investors.

However, it's important to note that treasury stock is not the same as regular shares that are held by investors. Treasury stock does not have voting rights, which means that these shares cannot be used to make decisions about the company. It's kind of like having a toy that looks really cool but you're not allowed to play with it or decide how to use it. The company holds onto these shares, but they don't have any say in how the company is run.

So, in simple terms, treasury stock is like a company's own personal stash of its stock that it buys back from the market. It can use these shares for different purposes like compensating employees or saving them for a later date. It's a way for the company to have control over its own shares and possibly increase their value. But remember, it's not the same as regular shares and doesn't give the company any voting power.