When a company acquires some of its own shares, either through share buybacks or when the shares are initially created but not entirely sold to the public, there are two categories these shares can fall into -- treasury shares and retired shares. Here are the key differences and similarities you need to know about.
Many different types of shares
First, it's important to mention several types of shares of stock:
- Authorized shares: The number of shares a company is allowed to issue. Companies can, and often do, issue fewer shares then are authorized.
- Issued shares: The total number of shares a company has ever issued, whether or not they were made available to be sold to the public.
- Outstanding shares: The total number of shares currently available to be bought and sold, as well as the shares held by institutions and insiders.
- Float: The number of shares available to be bought and sold by the public.
Treasury shares are shares of a company's stock that are owned in the company's "treasury." There are two main ways shares end up in the treasury.
First, treasury shares may come from a share repurchase or buyback. Many companies buy back their own shares with retained earnings for a variety of reasons. For example, if the company believes that its shares are trading for less than their intrinsic value, it may choose to use more of its earnings to acquire its own stock at a discount, as opposed to simply paying dividends.
Or, a company's treasury stock may have never been issued to the public at all, and was simply created when the company's shares were first issued. Companies may do this to create some financial flexibility since treasury shares can always be sold to raise cash if needed. Or, enough stock in the company's treasury can ensure nobody else will amass a controlling stake.
It's important to point out that treasury shares still have value, and are listed on the company's balance sheet. This is one of the key differences between treasury and retired shares.
Sometimes when a company buys back shares of its own stock, it doesn't have the desire to hang on to them. In this case, the company can choose to cancel, or retire the shares according to SEC regulations. Once shares are retired, they cannot be reissued, and no longer have any financial value nor do they represent any ownership in the company.
Treasury shares and retired shares have a few things in common. Most notably, neither type is included when calculating the company's number of outstanding shares. Also, treasury and retired shares don't receive dividend payments, and no longer have any voting rights or ownership.
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