What are Stock Options?

January 8, 2019 3:19 am Published by Leave your thoughts

WHAT ARE THEY Stock options are specially designated stocks that companies offer their employees and executives. They are almost always “common” shares, and their owners can trade them like any other stock. How they are obtained and priced is what makes them unique.

HOW THEY WORK Large, publicly-traded companies always offer an employee stock purchase plan (ESPP). Employees can purchase shares of stock directly from their paycheck. They can designate a percentage of their salary to purchase the shares at a discount from the publicly traded price. Discounts vary company to company from 10% to 20% or more. However, there is usually a cap on how much of your check you can use to purchase with. And, you can’t just jump in and out of these programs. When you decide to buy, you elect to participate one quarter at a time.

REGULATIONS Since employee shareholders can be assumed to possess inside information on how well a company is performing or will likely perform in the future, selling and buying those shares can come with restrictions. ESPPs, like other trading activities, are regulated by the Securities and Exchange Commission (SEC) and are therefore subject to legal enforcement. Officers are appointed internally to ensure that employees abide by any trade restrictions that are in place.

STOCK BONUSES Another stock ownership plan works a little further up the corporate chain. Boards of Directors approve stock bonuses to reward their employees for exceeding sales goals. If managers beat their sales targets, their teams get to buy shares at a tremendous discount. A high profit percentage is guaranteed, and the only expense is the trade fee.

STOCK REWARDS At the top of the chain are all out stock awards. The Board awards the CEO shares outright when the company’s stock reaches a certain dollar value or experiences a rate of growth over a short period of time. These deals are oftentimes negotiated far in advance, even when an executive is hired. CEO Tim Cook was awarded 560,000 shares of vested stock last year when Apple became the first $1 trillion company in US history. Business Insider

I have participated in ESPPs in the past and it worked out well for me. You can use them as an unconventional way to grow your savings. If your company is doing at least okay, I recommend them. You can’t fail!

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This post was written by Daniel Jones

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