If you want to know what is Treasury stock?, why are treasury shares not circulating on exchanges and not everyone can buy them? Please follow the following article of Chanh Tuoi for more detailed information!
what is Treasury stock?
what is Treasury stock? This is a type of stock that the issuing company itself buys and holds like other ordinary investors. These shares are not included in the number of outstanding shares.
In fact, joint stock companies buy back their issued shares in the following cases:
- When the quantity and price of a company’s shares are low in the market, they will buy back shares to increase the quantity demanded to push the price up. The repurchase of treasury shares also prevents the possibility of manipulation of the company from the outside. This is a familiar measure of many companies around the world.
- Companies use this way to influence the market to make stock trading more active. At the same time, limiting the rate of price decline helps the stock price to rise again. Therefore, many countries, including Vietnam, have set many regulations on buying volume, buying rate, capital source to buy stocks, etc. to limit the negative side of buying treasury shares.
- Treasury shares are jointly owned by the company and are excluded from paying dividends. Therefore, the company can buy treasury shares to benefit shareholders. Or you can simply understand when the company’s leaders are under pressure from having to earn per share from shareholders.
- Another case to buy treasury shares is when the company has some idle money without investment projects. At the same time, the business activities are developing well, the average profit is higher than the industries in which they intend to invest.
- The company buys treasury shares to reward senior employees. This is a measure used by many companies to motivate and engage employees. Normally, using treasury shares as a prize requires a payment source from the bonus and welfare fund.
- The company needs to adjust its financial structure, so it wants to buy back shares. The share repurchase is intended to reduce the company’s charter capital for a period of time.
Features of treasury stocks
To understand what treasury shares are?, we also need to understand its most basic characteristics, specifically:
- Treasury shares reduce the circulation of company shares on the stock market.
- Treasury shares do not have voting rights, do not pay dividends, and do not have the right to buy new shares.
- The number of treasury shares that companies can hold is limited by law.
Advantages and disadvantages of treasury stocks
Treasury shares are a type of stock that has a lot of advantages, but it also has certain disadvantages. Specifically, the advantages and disadvantages of this type of stock are as follows:
Advantages
- When a company’s stock is undervalued, the corporate buyback of treasury shares will create an opportunity to increase the price, stimulating the stock. Besides, this also helps to regain the trust of the shareholders of the business.
- In case the stock price of an enterprise is falling deeply, treasury shares will partly help the enterprise to confirm to investors as well as shareholders that the company is still doing very well.
- The purchase of corporate shares helps to influence the trend of market price fluctuations, increase stock prices, stimulate demand or help slow down the price of shares. Thereby, making the trading market more attractive and vibrant.
- Seen as an investment channel, businesses can effectively use idle cash.
- Instead of ESOP, enterprises can issue bonus shares to employees.
- Helps to improve return on share (EPS) indicators in the market.
Defect
- Often easily abused, affecting the financial security of the company. Thereby, causing damage to other shareholders in the enterprise.
- Trading a number of treasury shares reduces cash resources as well as reduces costs for other activities of the company.
- In some cases, the purchase of treasury shares by an enterprise may cause the share price in the market to remain unchanged or even continue to decrease.
- When a company buys treasury shares, it can affect investor sentiment, making them think that the growth potential of the business is being reduced. Thereby, reducing the confidence of investors as well as shareholders of the business.
Purpose of buying and selling treasury shares
Companies buy stocks as treasury shares to optimize their investment from idle cash with their own shares at a time when the price is forecasted to increase sharply. The purpose of the Enterprise buying and selling treasury shares is:
- Increase control of the company: Limit the case of individuals or organizations taking advantage of falling stock prices and buying in large quantities to manipulate and gain control of the company in the future.
- Buy and resell: Companies will often buy treasury shares when the market is down and sell them back when the market is up for the difference. The difference will not be recognized in net profit but also helps to improve cash flow as well as increase equity surplus on financial statements.
- Improve the company’s financial ratios: When the purchase causes the number of shares outstanding to decrease, several other metrics will increase indirectly, such as ROE (return on equity). ownership), EPS (earnings per share), etc. At that time, the demand to buy shares of the company is large and helps the stock price increase.
- Guaranteed shareholder benefits: Buying treasury shares is also a way that companies stand up to ensure shareholders’ interests when stock prices go down. At this time, the number of outstanding shares on the market will decrease, reducing the supply, creating motivation for stocks to increase again. Reducing the number of shares outstanding is also a way to increase the value of each shareholder’s share.
- Withdrawal of ESOP shares: The company will buy back ESOPs from employees who leave and sell them back to current employees to motivate them to work.
Regulations on buying and selling treasury shares
Companies have the right to buy and sell but must comply with certain regulations regarding treasury shares. Accordingly, companies are only allowed to purchase no more than 30% of the total number of ordinary shares previously sold. Or a part or all of the preferred shares have been sold with some provisions as follows:
- The Board of Directors has the right to buy back but not more than 10% of the total number of shares offered for sale within 12 months.
- The Board of Directors can decide on its own the price of shares to be repurchased. However, the purchase price must not be higher than the market price at that time.
- The company can buy back shares from shareholders but it needs to get the approval of all shareholders within 30 days. At the same time, shareholders who resell shares must also send an offer to sell by guaranteed method within 30 days.
Conditions for redemption of treasury shares:
1. A public company that repurchases its own shares as treasury shares must satisfy the following conditions:
- The plan to buy back shares was approved by the Board of Directors. In which, the implementation time and principles of price determination are clearly stated;
- A designated securities company conducts transactions in accordance with regulations on treasury shares
- Sufficient resources to buy back shares from the following sources: Equity surplus or development investment fund, undistributed profit after tax, other equity sources used to repurchase shares in accordance with the law. the law;
- There is a decision from the General Meeting of Shareholders approved in the case of repurchase of more than 10% of the total number of ordinary shares. Or more than 10% of the total number of dividend preference shares that have been issued or approved by the Board of Directors in the case of redemption of no more than 10% of the total number of ordinary shares. For a period of 12 months or not more than 10% of the total number of dividend preference shares issued in every 12 months;
- Satisfying the conditions prescribed by specialized laws for the case of a public company in a conditional business field or line.
- A public company that buys back ordinary shares so that the number of treasury shares reaches 25% or more of the total number of shares of the same type in circulation of the company, it must make a public bid;
2. Redemption of shares exempted under Clause 1 of this Article in the following cases:
- Repurchase fractional shares by issuing shares to pay dividends, and issue shares from equity in accordance with the provisions on treasury shares.
- A securities company that buys back its shares to correct trading errors is regulated by the State Securities Commission.
- Redemption of shares at the request of shareholders is specified in Article 90 of the Law on Enterprises.
Conditions for selling treasury shares:
- There is a decision from the Board of Directors to approve a specific sale plan. It clearly states the implementation time and the principle of price determination.
- To be appointed by the securities company to perform the transaction.
- Public companies may only sell treasury shares after 6 months. From the date the last acquisition ended. Except for the case that treasury shares are sold or used as bonus shares for employees. Public companies may destroy treasury shares to reduce the company’s charter capital or sell and use them as bonus shares to increase charter capital; cannot be used as collateral, assets for capital contribution or swap.
- In case treasury shares are sold in the form of a public offering or a private placement. Public companies shall comply with regulations on offering shares to the public or offering private shares.
How to buy and sell treasury shares
A public company whose listed shares are traded on the Stock Exchange when repurchasing shares or selling treasury shares must comply with the trading regulations of the Stock Exchange.
In case a public company with unlisted shares is traded on the Stock Exchange, when buying back shares, it can only be done through a designated securities company.
Principles of determining the price of treasury shares
The purchase and sale of treasury shares will comply with regulations on treasury shares through order matching method or on the principle of agreement as follows:
- Ask price ≥ Reference price – (Reference price x 50% Stock price range)
- Bid Price Reference Price + (Reference Price x 50% Stock Price Range)
In each trading day, the company registers to trade treasury shares by order matching method when placing trading orders with a total volume of at least 3%, maximum 10% of the registered trading volume.
Some notes when investing in treasury stocks
An investor needs to be knowledgeable about the market and the types of stocks, and also understand the rules of execution in stock trading. In particular, to trade treasury shares, investors should note the following issues:
- When trading treasury shares, enterprises need to consider the interests and rights of all shareholders. Thereby limiting the imbalance of benefits such as those who have to buy at too high a price, others buy at too low a price.
- With the consent of the general meeting of shareholders, treasury shares can be completely canceled for the purpose of reducing charter capital.
- Treasury stock can be issued at any time as it is treated similarly to an unissued share.
- A business that buys back treasury shares will reduce a certain amount of capital. Therefore, the company owner needs to make the necessary contingency plans and carefully calculate this decrease. From there, it does not affect business operations.
Answers to questions related to treasury stocks?
Are treasury shares an asset or a source of capital?
If many people are thinking that the company spends money to buy treasury shares, that it is the property of the company, it is a big mistake and will cause bad effects. Many people still think that treasury shares are something that exists, but in fact it is just an unrealistic thing, even though it is recorded in the books, it is still not an asset of the business.
More specifically, if you look at the balance sheet of a joint stock company, the position of treasury shares will usually be placed on the right side, ie the capital side of the business, so it cannot be called an asset. Okay.
What are English treasury stocks?
Treasury shares in English are Treasury shares
When is treasury stock negative?
On the balance sheet, when a company buys back shares, these shares are recorded in equity in the treasury shares section. Thus, when the number of treasury shares increases, it reduces the owner’s equity but does not reduce the charter capital.
Can treasury shares receive dividends?
Owners of treasury shares do not have voting rights, cannot pay dividends, and cannot buy new shares.
Thank you for watching! Looking forward to the article What are treasury stocks? The above basic knowledge about treasury stocks has provided you with the most necessary information.
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