Capital stock vs. treasury stock: the difference
Capital Stock vs. Treasury Stock: An Overview
Capital stock and treasury shares both describe two different types of shares in a company. Share capital is the total number of shares a company is authorized to issue, while treasury shares are the number of shares a company holds in its treasury. Treasury shares are essentially capital shares that have been redeemed or have never been issued to the public.
There are many reasons why a company may issue additional share capital instead of buying back its shares and increasing its own shares. However, the business may experience a short-term monetary benefit in favor of a long-term ownership or buyout strategy.
Key points to remember
- Share capital is the outstanding shares of a company. They can be purchased and with them an investor acquires voting rights and sometimes dividends.
- Treasury shares, or treasury shares, are shares owned by a company. They have no voting rights and do not pay dividends.
- Since share capital carries voting rights, some companies will buy them back from the public or others in order to retain voting control.
Share capital consists of common and preferred shares of a corporation that it is authorized to issue under the corporation’s charter. The corporate charter is a legal document and indicates the maximum amount of shares a company is allowed to issue. Investors who own common and preferred stock may have advantages, such as receiving dividends and having voting rights.
For example, ABC Company’s corporate charter states that it can issue a maximum of 200 million shares, consisting of 150 million common shares and 50 million preferred shares. ABC Company issues 100 million common shares and 20 million preferred shares. Therefore, if investors have a long position in the stock, shareholders receive all the benefits associated with the stock.
Unlike share capital, treasury shares do not pay dividends.
A company issues shares to raise capital. Depending on its goals and outlook, a company may decide that it has issued too many shares, not enough shares, or that its shares are worth too much or too little. The company will then undergo the process of stock buybacks, stock reissues, stock consolidations or, in a generally lamented move to general markets, stock splits.
Conversely, treasury shares correspond to the number of shares issued minus the number of shares in circulation. Treasury shares can come from a share buyback or when the issuing company is unable to sell all the shares it has issued. Unlike common and preferred shares, they carry no voting rights.
For example, ABC Company issued 100 million shares of common stock and was only able to sell 70 million of those shares. In addition, he issued 20 million preferred shares and was only able to sell 5 million of those shares. Therefore, ABC Company has 30 million (100 million – 70 million) common stock and 15 million (20 million – 5 million) preferred stock in its treasury.