TYPES OF

STOCK
THAT'S ALL YOU NEED TO KNOW
ABOUT COMMON STOCK
 TREASURY SHARES
KEY TAKEAWAYS:
• TREASURY STOCK IS FORMERLY OUTSTANDING
STOCK THAT HAS BEEN REPURCHASED AND IS
BEING HELD BY THE ISSUING COMPANY.
• TREASURY STOCK REDUCES TOTAL
SHAREHOLDER'S EQUITY ON A COMPANY'S
BALANCE SHEET, AND IT IS THEREFORE A
CONTRA EQUITY ACCOUNT.
• THERE ARE TWO METHODS TO RECORD
TREASURY STOCK: THE COST METHOD AND
THE PAR VALUE METHOD.
 EXPLANATION
• EVERY COMPANY IS AUTHORIZED TO ISSUE A CERTAIN
NUMBER OF SHARES. THIS IS REFERRED TO AS “SHARES
OUTSTANDING,” OR THE TOTAL SHARES THAT EXIST FOR A
COMPANY.
• OF THOSE OUTSTANDING SHARES, SOME SHARES ARE
RESTRICTED (MEANING THEY CANNOT BE TRADED UNLESS
CERTAIN CONDITIONS ARE MET) WHILE MOST SHARES ARE
PUBLICLY TRADED (KNOWN AS THE “FLOAT”).
• TREASURY STOCKS ARE SHARES THAT WERE ORIGINALLY
PART OF “SHARES OUTSTANDING” BUT THAT HAVE BEEN
REPURCHASED BY THE COMPANY.
 THERE ARE SEVERAL REASONS WHY
COMPANIES REACQUIRE ISSUED AND
OUTSTANDING SHARES FROM THE
INVESTORS.
• 1. FOR RESELLING
• TREASURY STOCK IS OFTEN A FORM OF RESERVED STOCK SET ASIDE TO RAISE
FUNDS OR PAY FOR FUTURE INVESTMENTS.
• COMPANIES MAY USE TREASURY STOCK TO PAY FOR AN INVESTMENT OR
ACQUISITION OF COMPETING BUSINESSES.
 2. FOR CONTROLLING INTEREST
THIS REPURCHASE ACTION LOWERS THE NUMBER OF OUTSTANDING SHARES,
THEREFORE, INCREASING THE VALUE OF THE REMAINING SHAREHOLDERS’ INTEREST
IN THE COMPANY.
REACQUISITION OF STOCKS CAN ALSO PREVENT HOSTILE TAKEOVERS WHEN THE
COMPANY’S MANAGEMENT DOES NOT WANT THE ACQUISITION DEAL TO PUSH
THROUGH. 
3. UNDERVALUATION
• WHEN THE MARKET IS NOT PERFORMING WELL, THE COMPANY’S STOCK MAY BE
UNDERPRICED – BUYING BACK THE SHARES WILL USUALLY BOOST THE SHARE PRICE
AND BENEFIT THE REMAINING SHAREHOLDERS.
• 4 FOR IMPROVING FINANCIAL RATIOS
 WHAT ARE THE LIMITATIONS OF TREASURY
STOCK?
• NO VOTING RIGHTS
• NOT ENTITLED TO RECEIVE DIVIDENDS
• NOT INCLUDED IN THE CALCULATION OF OUTSTANDING SHARES
• DO NOT EXERCISE PREEMPTIVE RIGHTS AS A SHAREHOLDER
• NOT ENTITLED TO RECEIVE NET ASSETS IN CASE THE COMPANY
LIQUIDATES
• IN SOME COUNTRIES, THE NUMBER OF TREASURY STOCKS HELD BY
COMPANIES IS REGULATED – TOTAL TREASURY STOCK CANNOT EXCEED
THE MAXIMUM PROPORTION OF CAPITALIZATION SPECIFIED BY LAW.
Example of Treasury Stock
A corporation has excess cash and does not see any attractive investments.
As a result, it decides to purchase 10,000 shares of its 300,000 shares of common stock that is held
by its stockholders.

The market value of the 10,000 shares is $40 per share.

The corporation's entry to record the purchase of these shares of stock is:

•Debit Treasury Stock for $400,000

•Credit Cash for $400,000
HOW IT WORKS IN REAL LIFE ?
 BUYBACK
• SHARE BUYBACK, OR SHARE REPURCHASE, IS WHEN A
COMPANY BUYS BACK ITS OWN SHARES FROM
INVESTORS. I
• IT CAN BE SEEN AS AN ALTERNATIVE, TAX-EFFICIENT
WAY TO RETURN MONEY TO SHAREHOLDERS. ONCE
SHARES ARE REPURCHASED THEY ARE CONSIDERED
CANCELLED, BUT THEY CAN BE KEPT FOR
REDISTRIBUTION IN THE FUTURE.
 WHAT IS BUYBACK ?
• STOCK BUYBACKS REFER TO THE REPURCHASING OF SHARES OF STOCK BY THE COMPANY
THAT ISSUED THEM. A BUYBACK OCCURS WHEN THE ISSUING COMPANY PAYS SHAREHOLDERS
THE MARKET VALUE PER SHARE AND RE-ABSORBS THAT PORTION OF ITS OWNERSHIP THAT
WAS PREVIOUSLY DISTRIBUTED AMONG PUBLIC AND PRIVATE INVESTORS. WITH STOCK
BUYBACKS, AKA SHARE BUYBACKS, THE COMPANY CAN PURCHASE THE STOCK ON THE OPEN
MARKET OR FROM ITS SHAREHOLDERS DIRECTLY. IN RECENT DECADES, SHARE BUYBACKS
HAVE OVERTAKEN DIVIDENDS AS A PREFERRED WAY TO RETURN CASH TO SHAREHOLDERS.
 THOUGH SMALLER COMPANIES MAY CHOOSE TO EXERCISE BUYBACKS, BLUE-CHIP
 COMPANIES ARE MUCH MORE LIKELY TO DO SO BECAUSE OF THE COST INVOLVED.