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Ownership Stake

Dear Dave
I’m a recent new shareholder at my firm and have a question about what happens to stock when a shareholder leaves the company. Specifically, how does the stock that is bought back affect my ownership stake in the firm?

Dear EF
When the company repurchases the shares of a departing shareholder, those particular shares are taken out of circulation and are thereafter referred to as treasury stock. The total number of shares outstanding after the transaction is now reduced by the number of shares bought back, so your shares, as a percentage of ownership is now larger as there are fewer shares outstanding. If the company at some future date resells all or a portion of the treasury shares, the total number of shares outstanding is now increased and your percent of ownership is proportionately reduced.

A not untypical scenario would be that instead of a departing shareholder selling his or her stock directly back to the company, creating treasury stock, the shareholder may instead sell their shares directly to other shareholders. In this example, the number of shares outstanding and your percent of ownership are each unchanged and remain the same.

Wahby and Associates