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When a company sells stock to the public, then re-purchases a few shares of its own...

When a company sells stock to the public, then re-purchases a few shares of its own stock we call that Treasury stock. What are a few reasons a company would want to purchase Treasury Stock?
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A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market.

Following are the reasons the company would want to purchase treasury stock:

  • Too much cash in the books and too few investment opportunities is a key reason for the purchase of treasury stock.
  • Treasury stock helps in reducing the cost of capital.
  • It helps in reducing ownership.
  • When a company purchase treasury stock, it results in a reduction of the number of shares outstanding and the capital base. To the extent, it improves the Earning per share and Return on equity of the company.
  • Benefit from the current undervaluation of stock. i.e purchasing its own shares at a lower price.
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