The financial press is always full of references to stock classifications, such as blue-chip stocks, growth stocks, airline stocks and micro-cap stocks. "Treasury stocks," however, don't belong on the list, because the term doesn't refer to any of the characteristics that stock classification systems are built upon.
Stocks are classified in many ways. You often see stocks classified according to market capitalization, or the total value of all the company's stock -- such as large-cap, mid-cap, small-cap and micro-cap. They can be classified by economic sector, such as tech stocks, transportation stocks or financial stocks. You can classify them by performance, such as growth stocks, income stocks or value stocks. You can classify them by geography or any other criteria you want. The common thread in all these systems is that it's not really the stock that's being classified; it's the company that issues the stock.
Treasury stock refers to shares of a company's stock that the company itself has bought back from investors. Companies repurchase their own stock for a variety of reasons. For one thing, reducing the number of shares in circulation tends to boost the stock price. Also, companies that want to give their employees stock or stock options often buy the required number of shares on the open market rather than simply issuing new shares, which would dilute the value of existing shares. Whatever the reason, once a company repurchases a share, that share becomes part of treasury stock.
Not a Classification
With the definition of treasury stock in mind, it's easy to see that treasury stock is not an actual stock classification. You can make a decision to invest in, say, large-cap stocks or tech stocks or value stocks or emerging market stocks. But to say you're going to buy "treasury stock" is like saying you're going to buy just "stock." It's meaningless, because companies of all kinds, all sizes and all sectors have treasury stock, just like they all have stock. Because it's treasury stock, by definition you can't buy it. These are shares that the company is holding onto.
Reselling Treasury Stock
Companies can and do resell their treasury shares on the open market. When they do, though, the shares are indistinguishable from any other share of their stock available for sale. The company sells treasury shares at the current market price. When you place an order with a broker for 100 shares of a company, it's possible that the shares you buy are coming out of the company's treasury. You won't know the difference. Treasury shares don't come with voting rights and don't get dividends while they're in the treasury. Once they're resold, their owner has voting rights and is eligible for dividends.
- "Financial Accounting for MBAs," Fourth Edition: Peter Easton, et al
- Guru Focus: Classification of Stocks
- NYSE Euronext: Industry Classification Benchmarks
- Brown Consultancy Services: How Are Shares/Stocks Classified?
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.