What is treasury stock?

Treasury stock refers specifically to shares that a company has repurchased from the open market or directly from shareholders. These shares are held by the company itself and are not considered when calculating earnings per share or dividends, as they are not outstanding in the market. The repurchase of shares can reflect various strategic decisions by the company's management, such as wanting to reduce the number of shares in circulation, which can enhance earnings per share, or signaling confidence in the company's own prospects.

When a company reacquires its shares, those shares are placed in the treasury and can be held indefinitely. They might be reissued later or even retired, which would permanently reduce the number of shares outstanding. Understanding this aspect is crucial in financial auditing and analysis, as treasury stock can affect a company's balance sheet and overall financial metrics.