Stock represents an ownership stake in a company. Corporations issue stock for a variety of reasons, including the need to raise money for operating capital and to expand operations or pay off debt. Companies can also repurchase shares of their own stock. How the company accounts for those shares determines whether this stock is treasury stock or retired stock.
Shares of Stock
The total number of shares of stock that a company can issue is stated in its articles of incorporation and is referred to as its “authorized shares.” The company may sell fewer than the number of authorized shares. Shares of stock issued by the company for sale to investors are called “issued shares.” The total number of shares held by investors is referred to as “outstanding stock.”
A company may repurchase shares of its stock from investors for a variety of reasons, such as to make shares available to employees for purchase through an employee stock option plan, or if the company's management believes the current market price of the stock is too low and represents a bargain. Shares repurchased by a company and held in its own account are referred to as “treasury stock.” This stock remains part of the company's issued shares but lowers the number of outstanding shares.
A company may repurchase shares of its stock from investors and then cancel, or retire, those shares. Retired shares cannot be used for employee stock option plans or any other purpose. Although the number of authorized shares remains the same, the number of outstanding shares and the number of issued shares are reduced by the number of shares retired.
Acquisition of a company's own stock is an equity transaction that results in no gain or loss on the company's books, regardless of the price paid for the stock. The transaction results in a contra-equity item that is reported as a debit against stockholder equity. Treasury shares do not earn dividends and do not provide the company with additional votes at the annual stockholders’ meeting. Treasury stock can be made available for employee incentive plans or reissued for sale to the public, whereas retired shares are canceled and cannot be used for any purpose. Retired shares reduce both the number of issued and outstanding shares of stock, typically making each share of outstanding stock proportionately more valuable.