Capital Stock vs. Treasury Stock: An Overview
Capital stock and treasury stock both describe two different types of a company's shares. Capital stock is the total amount of shares a company is authorized to issue, while treasury stock is the number of shares a company holds in its treasury. Treasury stock is essentially capital stock that has been bought back or was never issued to the public.
There are many reasons why a company might issue additional capital stock instead of buying back its shares and increasing its treasury stock. However, the company may suffer a short-term monetary advantage in favor of a long-term ownership or buyback strategy.
- Capital stocks are the shares outstanding for a company. They may be purchased, and with them, an investor gains voting rights and sometimes dividends.
- Treasury stock, or treasury shares, are shares a company owns. They do not carry voting power and do not pay out dividends.
- Because capital stock carries voting rights, some companies will buy them back from the public or from others in order to retain voting control.
Capital stock consists of a company's common and preferred shares that it is authorized to issue based on the company's corporate charter. The corporate charter is a legal document and indicates the maximum amount of stock a company is allowed to issue. Investors who own common and preferred shares may have benefits, such as receiving dividends and having voting rights.
For example, company ABC's corporate charter indicates it may issue a maximum of 200 million shares, consisting of 150 million shares of common stock and 50 million shares of preferred stock. Company ABC issues 100 million shares of common stock and 20 million shares of preferred stock. Therefore, if investors are long in the stock, the shareholders receive any benefits associated with the stock.
Unlike capital stock, treasury stock does not pay dividends.
A company issues stock to raise capital. Depending on their goals and outlook, a company might decide they issued too many shares, not enough shares, or their shares are worth too much or too little. The company will then undergo the process of buying back shares, reissuing shares, consolidating shares, or—in a usually lamented move to the general markets—split shares.
Conversely, treasury stock is the number of shares issued less the number of outstanding shares. Shares of treasury stock may be from a stock buyback or from when the issuing company is unable to sell all of the shares it issued. Unlike common and preferred stock, they do not offer any voting rights.
For example, company ABC issued 100 million shares of common stock and was only able to sell 70 million of those shares. In addition, it issued 20 million shares of preferred stock and was only able to sell 5 million of those shares. Therefore, company ABC has 30 million (100 million - 70 million) common shares and 15 million (20 million - 5 million) preferred shares in its treasury.