When a company buys back its own shares and holds them as treasury stock, how is the number of outstanding shares affected?

• A. Outstanding shares decrease; treasury shares are not considered outstanding.
• B. Outstanding shares increase equal to treasury stock.
• C. Outstanding shares unchanged.
• D. Outstanding shares become double.

Answer: (A)

When a company buys back its own shares and holds them as treasury stock, those shares are no longer outstanding. Outstanding shares are the shares currently held by investors and available for trading in the market. Shares held by the company as treasury stock are not circulating, so they aren’t counted as outstanding. For example, if 1,000,000 shares were issued and 150,000 are held as treasury stock, the outstanding shares would be 850,000. Treasury stock typically has no voting rights and does not receive dividends while held by the company, reinforcing why they aren’t considered outstanding.