Are Treasury Stocks the Same as Preferred Stocks?

by Slav Fedorov ; Updated July 27, 2017

No, treasury stocks are not the same as preferred stocks. Preferred stocks are securities issued by a corporation to raise money. Treasury stock refers to common stock that a corporation issued and subsequently bought back.

Common Stock Issuance

A corporate charter stipulates the maximum number of shares, or authorized stock, that a corporation can issue. Corporations rarely issue all the authorized stock at once. They start by selling a percentage in an initial public offering, known as an IPO, and then sell more stock periodically in secondary offerings to raise capital as needed. The stock thus issued and in the hands of investors is called "outstanding."

Treasury Stock

Treasury stock is the stock that a corporation issued and subsequently bought back in the open market. A corporation can hold the treasury stock, retire it or reissue it, for example, to fund employee stock options.

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Stock Repurchases (Buybacks)

Corporations buy back their own stock when they deem it to be the best way to use corporate cash to enhance shareholder value. Investors evaluate corporate earnings growth on a per-share basis. When a corporation buys back its own stock, it reduces the number of shares outstanding so earnings per share increase, making the stock more valuable and more likely to go up.

Preferred Stock

Preferred stock is a cross between common stocks and bonds based on the features and benefits it carries. Corporations issue preferred stock in addition to common stock to raise capital.

Why Preferred Stock Cannot Be Treasury Stock

Common stocks are perpetual securities, so a corporation can hold treasury stock indefinitely. Preferred stocks are issued with a call provision, meaning that the corporation has the right to call, or redeem them, at par, or face value. Once redeemed, preferred stocks cease to exist, just like matured bonds.

References

  • "PassTrak Series 7 General Securities Representative License Exam Manual"; 2003

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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