5 things you need to know about stock options and the potential investment opportunity at your company
Stock options provide a way for employees to invest in company they work for
Many companies choose to offer employees stock options, which allows employees to invest in the company by buying a specific number of shares at a pre-determined price. There is generally a set dollar amount that employees pay per share.
When it comes to stock options, there are benefits for both the employer and the employee. One of the biggest benefits for employers is that stock options could serve as an incentive for employees to work hard and contribute to the success of the company. After all, a successful and prospering company means that employees' investments are going to grow as well. For employees, they are typically able to buy shares at a fairly low rate and can potentially make a lot of money in the long run, if the company is successful. As with any investment, there are risks at play; the most obvious being that if the company plummets, so does your money.
Below is general information that will give you a better idea of how stock options work.
Stock options allow employees to invest in the company for which they work. (iStock / iStock)
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- Stock options can potentially allow you to invest small but win big
- Start-ups, private companies and corporations can all choose to offer stock options
- There are two basic types of employee stock options
- Understanding how stock options work
- Factors you should consider when it comes to stock options
1. Stock options can potentially allow you to invest small but win big
Stock options provide a way for employees to get more involved with the company for which they are working and potentially watch their money grow down the line with the success of the company.
Investing in a company that you're working for can provide a stronger sense of pride and will to succeed. Individuals invest their hard-earned money in companies that they believe are going to be successful, which in turn, helps earn them more money.
Often, the stock option price is lower than the market price, allowing employees to buy shares without having to put large sums of money on the line.
A small investment can have a big payout if the company is successful. (iStock / iStock)
2. Start-ups, private companies and corporations can all choose to offer stock options
All different types of companies offer stock options, from small start-ups to huge corporations. There are many large companies that offer generous stock options to their employees, including many companies of which you are likely familiar. The Cheesecake Factory, GoDaddy, Aflac, Intuit and Nordstrom are just a few companies that offer stock options.
3. There are two basic types of employee stock options
Incentive stock options (ISO) and non-qualified stock options (NS) are the two basic types of stock options offered at companies. Incentive stock options allow employees the option to buy company stock at a discounted price with possible tax breaks on profit that could be earned.
Non-qualified stock options are not quite as tax-friendly. With non-qualified stock options, once exercised, in other words, once you purchase shares of a company's stock at a determined price, "the difference between the fair market value of the stock and the grant price of the option is taxable to the employee in the same year in which the option is exercised," according to Fidelity.
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Make sure to fully examine your stock option contract before accepting. (iStock / iStock)
4. Understanding how stock options work
A stock option starts out with a contract. Your contract will include how many shares you can purchase, when, and at what price you can purchase each of them. This is known as the strike price or the exercise price.
There will also be a vesting date as part of your contract. This is the date at which you have ownership of your options and are able to exercise them. Another date will be your expiration date. This is the amount of time that you have to exercise your options. You can choose to exercise your options at any point while you are an employee up until that final date, which is typically up to 10 years.
5. Factors you should consider when it comes to stock options
When deciding whether to accept stock options at your company, there are lots of things for you to consider. As a general rule of thumb for all types of investments, it is important to have money saved up first. Consider accounts like an emergency fund and general savings. Do you have enough saved up in case of an emergency? Are you comfortable paying all your weekly and monthly expenses? Always remember that investments are a risk, so don't invest any money you aren't OK with potentially losing.
Another factor you'll want to look into is the current stock price of the company. If you choose to exercise stock options, double check and make sure that your strike price is lower than the market price.
When putting money toward any kind of investment, make sure you also have enough money to cover bills as well as money dedicated to any emergency that could arise. (iStock / iStock)
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Hopefully, you're working at a company that you believe is going to be successful or a company that has steadily remained on the road to success. If you feel like the company's trajectory is a positive one, this is a good reason to invest. It may seem like a huge risk to invest in a company during its early stages, and while there is risk, there could also be a lot of reward in these starter companies.