What is treasury stock? This article will give you a detailed look at treasury stocks, helping you grasp its nature and role in your investment strategy.
What is treasury stock?
Treasury shares are shares that have been issued by a joint stock company and then repurchased by the company using its own capital. This is similar to an investor buying shares in a company, but with the special feature that the company invests in itself. It is important to note that treasury shares are not shares that have failed to be issued; instead, they are part of the company’s strategic financial decisions.
What is treasury stock in English?
In English, “treasury stock” is called “Treasury Stock.” This is a type of stock issued by a company and then repurchased with its own capital. The fact that the company repurchases these shares does not mean that the issued shares do not meet the requirements, but on the contrary, it is often part of a financial management strategy, helping to optimize the company's resources.
Do treasury stocks pay dividends?
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Treasury stock does not receive dividends and does not have voting rights or other benefits like common stock. The law also limits the amount of treasury stock a company can retain, in order to maintain stability and protect the interests of other shareholders.
When a company owns treasury stock, it has the option to cancel, retain, or reissue it in the market if it needs to raise additional capital. Buying back treasury stock reduces the company's equity and book value, while selling it increases the book value. The difference between the purchase price and the selling price is recorded in the company's capital surplus.
Procedures and Conditions for Buying and Selling Treasury Stocks
1. Reasons Why Businesses Buy Back Treasury Stock
When learning about treasury stock, many people often wonder about the benefits that a company can gain from buying back its own shares. Here are the main reasons why companies do this:
Strengthening Corporate Control: Buying back shares can help companies protect themselves from the risk of being taken over, especially when the stock price has fallen sharply. This helps the company reduce the possibility of being acquired by outside parties.
Increase Equity Value: When the stock price is low, the company can buy to optimize costs. Then, the company can sell when the stock price is high, thereby taking advantage of the price difference to increase profits without affecting the net profit much.
Improve Financial Ratios: A company buying back its own shares can help improve its financial metrics, such as earnings per share (EPS) and return on equity (ROE). It also improves the company's liquidity.
Protecting Share Value for Shareholders: In a bear market, share buybacks reduce the supply of shares in the market, thereby increasing the value of shares owned by current shareholders.
According to the provisions of the Securities Law 2019, public companies in Vietnam must obtain approval from shareholders before buying back treasury shares for the purpose of reducing charter capital. This ensures that the stock buyback process is carried out in a transparent manner and limits the situation of frequent stock buybacks.
2. Conditions for buying back treasury stocks
The repurchase of treasury shares by a public company must comply with strict legal regulations and cannot be done arbitrarily. According to Clause 1, Article 36 of the Securities Law 2019, a company wishing to repurchase its own shares must meet the following conditions:
- Approval requirement of the General Meeting of Shareholders: Companies require a decision from the General Meeting of Shareholders when they want to buy back shares to reduce their charter capital. This decision must clearly state the plan for buying back shares, including the expected number of shares, the implementation time, along with the principle of determining the purchase price.
- Legal capital sources: The Company must ensure sufficient legal capital sources to carry out the acquisition, which can come from funds such as capital surplus, development investment fund, undistributed profits after tax, or other funds of equity that are allowed to be used to supplement charter capital according to the law.
- Securities company conducting the transaction: The repurchase must be conducted by a designated securities company, unless that securities company is a member of the Vietnam Stock Exchange and repurchasing its own shares.
- Compliance with industry regulations: If a public company operates in a conditional business investment industry, it must ensure compliance with relevant legal regulations.
- Requirement not to be prohibited from repurchase: The Company will not be allowed to repurchase shares in the following cases, according to Clause 3, Article 36 of the Securities Law 2019:
- The company has overdue debts, based on the most recent audited financial statements. If the acquisition is expected to take place more than 6 months after the end of the financial year, the company should rely on the audited or reviewed semi-annual financial statements.
- The company is currently in the process of selling or issuing additional shares to raise new capital.
- The company's shares are in a public offering, except for repurchases to correct trading errors or to repurchase fractional lots of shares.
- The company has just repurchased its own shares within 6 months from the date of reporting the repurchase results or within 6 months after the end of the capital increase share issuance, except in cases where the conditions for repurchasing treasury shares are exempted.
- These regulations aim to ensure transparency and protect shareholders' rights, while helping to maintain the stability of the stock market.
3. Conditions for selling treasury stocks
According to the provisions of the Securities Law 2019, securities companies and public companies that buy back their own shares are allowed to sell the shares immediately after the buyback in the following cases:
- Securities companies buy back their own shares to correct trading errors or buy back odd-lot shares;
- Public companies buy back fractional shares according to the plan of issuing shares to pay dividends, the plan of issuing shares from equity capital;
- Public companies buy back odd-lot shares at the request of shareholders.
4. Some notes when investing in treasury stocks
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To be able to invest effectively in treasury stocks, it is extremely important to carefully research the stock market and master the trading regulations before proceeding. buy treasury stock. Here are some factors to consider before making an investment decision:
- Shareholders' interests: You need to consider the interests of current shareholders, especially whether the company's purchase of treasury shares will affect their interests. This is necessary to avoid a situation where one person buys shares at too high a price, while another can buy at a lower price, causing an unfair distribution of benefits.
- Cancellation of treasury shares: Treasury shares after being bought back may be cancelled if approved by the General Meeting of Shareholders. This is usually for the purpose of reducing the company's charter capital. However, if cancellation is not carried out, these shares can be reissued or sold on the market at any time, provided that they fully comply with the conditions and regulations on the purchase and sale of treasury shares under current laws.
- Impact on capital: The company's repurchase of treasury shares will result in a change in the company's capital. Careful calculation is needed to ensure that this change does not affect the financial performance and overall stability of the business.
Treasury stock is an asset or capital source
In accounting, treasury stock is not considered an asset of the company but is part of the owner's equity. On the balance sheet, treasury stock will be recorded in the capital section, on the right side.
Although a company owns treasury stock, it does not contribute to the company's outstanding shares. This means that treasury stock does not provide benefits such as dividends to the company. Treasury stock is essentially a temporary withdrawal from the company's operating capital and cannot be used or invested as a real asset.
Treasury stock accounting
Treasury shares are accounted for through account 419 in the accounting principles. This account records the value of shares that the company has bought back from shares issued to the public. Changes in the value of treasury shares will be reflected in this account.
If the company buys back treasury shares with the intention of immediately cancelling them, the value of the treasury shares will be deducted directly from the owner's equity and share premium. In this case, the treasury shares will be accounted for through account 411.
Conclude
Treasury stock is a financial instrument that can bring many benefits to businesses if managed properly and in compliance with legal regulations. Understanding treasury stock not only helps investors make accurate decisions, but also helps maximize profits and minimize unwanted risks. We hope that the information HVA Group provides will assist you in researching and preparing thoroughly before making investment decisions, thereby achieving the best results.
