Stock Investing 101 – Treasury Stock

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Investing 101: The Difference Between Stocks and ETFs

Here is a list of last year’s top performing funds.

There’s a world of opportunity beyond stocks, from ETFs to treasury bonds, and it’s in an investor’s best interest to know their options.

Here we tackle the question, “What is an ETF, and how is it different from a stock?”

ETF stands for exchange traded fund, and just like a stock, it is traded on stock exchanges such as NYSE and NASDAQ. But unlike a stock, which focuses on one company, an ETF tracks an index, a commodity, bonds, or a basket of securities.

Owning ETFs can help hedge risks associated with individual companies, and it allows investors to get involved with an entire index or industry with a single investment.

Image source: Getty Images.

Growing popularity and diversity
There are nearly 1,300 ETFs on the market and hundreds more in the works.

Several are index-based ETFs with a diverse group of unrelated industries (e.g., the S&P 500). There are also an increasing number of ETFs representing a range of specific sectors and strategies.

In recent years, specialist funds have proved most profitable to the ETF industry. They typically have a narrow focus (i.e., rare earth companies, oil, green energy, smartphones or cloud computing software) that allows investors to bet on a larger trend instead of a single company’s performance.

Trading an ETF
ETF are traded just like stocks, and investors can buy as many or as few shares as they want. Prices change throughout the day, and just like ETFs, shares can also be shorted — an investment technique that allows an investor to make money when the value of a stock falls.

Business section: Investing ideas
Interested in exploring Exchange-traded funds? Here is a list of last year’s top performing funds — click on any of the links to dig deeper. (Click here to access free, interactive tools to analyze these ideas.)

1. iShares Barclays 20+ Year Treas Bond (NYSE: TLT): The fund has gained 1.57% over the last month, and gained 34.45% over the last year.

2. ProShares Ultra 7-10 Year Treasury: The fund has gained 2.34% over the last month, and gained 33.60% over the last year.

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3. PowerShares Build America Bond: The fund has gained 1.17% over the last month, and gained 21% over the last year.

4. Utilities Select Sector SPDR (NYSE: XLU): The fund has gained 0.84% over the last month, and gained 15.96% over the last year.

5. iShares Barclays 7-10 Year Treasury: The fund has gained 1.34% over the last month, and gained 15.77% over the last year.

6. Vanguard Utilities ETF: The fund has gained 0.67% over the last month, and gained 15.17% over the last year.

7. iShares Dow Jones US Utilities (NYSE: IDU): The fund has gained 0.69% over the last month, and gained 14.98% over the last year.

8. iShares Barclays TIPS Bond (NYSE: TIP): The fund has gained 0.59% over the last month, and gained 14.25% over the last year.

9. Consumer Staples Select Sector SPDR (NYSE: XLP): The fund has gained 1.52% over the last month, and gained 13.44% over the last year.

List compiled by Eben Esterhuizen, CFA. Kapitall’s Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Data sourced from Finviz.

Treasury Stock (Treasury Shares)

What Is Treasury Stock (Treasury Shares)?

Treasury stock, also known as treasury shares or reacquired stock refers to previously outstanding stock that is bought back from stockholders by the issuing company. The result is that the total number of outstanding shares on the open market decreases. These shares are issued but no longer outstanding and are not included in the distribution of dividends or the calculation of earnings per share (EPS).

Key Takeaways

  • Treasury stock is formerly outstanding stock that has been repurchased and is being held by the issuing company.
  • Treasury stock reduces total shareholder’s equity on a company’s balance sheet, and it is therefore a contra equity account.
  • There are two methods to record treasury stock: the cost method and the par value method.

Treasury Stock

Understanding Treasury Stock (Treasury Shares)

Treasury stock is a contra equity account recorded in the shareholder’s equity section of the balance sheet. Because treasury stock represents the number of shares repurchased from the open market, it reduces shareholder’s equity by the amount paid for the stock.

In addition to not issuing dividends and not being included in EPS calculations, treasury shares also have no voting rights. The amount of treasury stock repurchased by a company may be limited by its nation’s regulatory body. In the United States, the Securities and Exchange Commission (SEC) governs buybacks.

Recording Treasury Stock (Treasury Shares)

When a company initially issues stock, the equity section of the balance sheet is increased through a credit to the common stock and the additional paid-in capital (APIC) accounts. The common stock account reflects the par value of the shares, while the APIC account shows the excess value received over the par value. Due to double-entry bookkeeping, the offset of this journal entry is a debit to increase cash (or other asset) in the amount of the consideration received by the shareholders.

Treasury shares reduce total shareholders’ equity and are generally labeled as “treasury stock” or “equity reduction”. There are two methods of accounting for treasury stock: the cost method and the par value method. The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value; under this method, the cost of the treasury stock is included within the Stockholders’ Equity portion of the balance sheet. It is common for stocks to have a minimal par value, such as $1, but sell and be repurchased for much more.

Under the cash method, at the time of the share repurchase, the treasury stock account is debited to decrease total shareholder’s equity. The cash account is credited to record the expenditure of company cash. If the treasury stock is later resold, the cash account is increased through a debit and the treasury stock account is decreased, increasing total shareholder’s equity, through a credit. In addition, a treasury paid-in capital account is either debited or credited depending on whether the stock was resold at a loss or a gain.

Under the par value method, at the time of share repurchase, the treasury stock account is debited, to decrease total shareholder’s equity, in the amount of the par value of the shares being repurchased. The common stock APIC account is also debited to decrease it by the amount originally paid in excess of par value by the shareholders. The cash account is credited in the total amount paid out by the company for the share repurchase. The net amount is included as either a debit or credit to the treasury APIC account, depending on whether the company paid more when repurchasing the stock than the shareholders did originally.

Example of Treasury Shares

ABC Company had originally sold 5,000 shares of common stock, with a $1 par value, for $41 per share. It therefore had $5,000 common stock (5,000 shares * $1 par value) and $200,000 common stock APIC (5,000 shares * ($41 – $1 paid in excess of par)) on its balance sheet. ABC Company has excess cash and believes its stock is trading below its intrinsic value. As a result, it decides to repurchase 1,000 shares of its stock at $50 for a total value of $50,000.

The repurchase creates a treasury stock contra equity account. Under the cash method, the treasury account would be debited for $50,000 and cash credited for $50,000. Under the par value method, treasury stock would be debited for $1,000 (1,000 shares * $1 par value), common stock APIC would be debited for $49,000 (1,000 shares * ($50 repurchase price – $1 par value)), and cash would be credited for $50,000.

In both the cash method and the par value method, the total shareholder’s equity is decreased by $50,000. Assume the total sum of ABC Company’s equity accounts including common stock, APIC, and retained earnings was $500,000 prior to the share buyback. The repurchase brings the total shareholder’s equity down to $450,000.

Treasury Shares vs. Retired Shares

Treasury stock can be retired or held for resale in the open market. Retired shares are permanently canceled and cannot be reissued later. Once retired, the shares are no longer listed as treasury stock on a company’s financial statements. Non-retired treasury shares can be reissued through stock dividends, employee compensation, or a capital raising.

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