Key Facts About Stock Options
Perhaps you have heard of companies offering their employees stock option plans, but do you really know what these are, and how you as an employees, can benefit from a employee stock options. This article guides you through a description of employee stock options (ESO) and emphasizes how they can benefit you as part of your investment portfolio.
Employee Stock Options – What are They?
Employee stock options (ESO) are contracts issued to employees of a company that give them the right to trade the company’s shares at a set price and within a certain time period. We have seen how normal stock option investing in the stock exchange works – however, employee stock options don’t work quite the same way (see the articles Stock Option Trading Basics and The Two Types of Stock Options for a general overview and information on buying and selling stock options). Basically, there is no Put component in employee stock options.
The main aim behind the issues of employee stock options is simply to boost business within an organisation. In theory, by affording employees the benefit of acquiring options of the company that they work for, they should be motivated to work harder for the advancement of the business. So ideally, employees perform at their peak to ensure that their company’s stock price rises and thuse investments will pay off.
In a more business-like tone, the purpose of employee stock plans is to align the incentives of the major shareholders of a company and its employees. However, many critics have noted that there is an huge difference between owning an option and really owning the underlying stock.
Should the stock’s price decrease, the owner of an option would miss the chance to make an extra gain, but would not face the same loss of investment as would an actual stockholder. At present, the employee stock option system is proving very successful and popular at a large number of major public companies around the world.
How Can I Exercise My Employee Stock Options?
The first thing to remember about exercising your employee stock options is that there is no access stock brokerage firms or online stock brokerage services at most companies. This probably means that you will have to do most of the legwork yourself.
A stock must be purchased by a licensed representative. What this means is, you will have to call a broker to inform them that you are wish to exercise your options. They can handle all the necessary paperwork for you and can even get in touch with the right people at your company to speed up the continuing process.
Most people opt to exercise through a cashless method by which you can use margins to acquire stocks instead of cash. We have described margins more fully in the article Stock Terminology for Beginners, but to recap, margins are actually loans that are granted by brokers to fund part of a stock investment.
After you have made the purchase and have sold your shares, you can pay for your loan (as well as the taxes). Be sure that these overheads that you need to pay before you can sell, are small enough for you to still make a profit.
Employee stock options are very attractive financial products that benefit both the company and its employees. They can both increase producticity, togetherness and team spirit, as well as gining the opportunity of making profit to many people who otherwise may not have been interested in stock option investing, or in the stock market in general.
If you work for a large company who runs an employees stock option scheme, we would encourage you to take the opportunity to invest. This possibly may not be easy for beginners to understand, but this article has hopefully given you an idea of the benefits that can open up to you once you know how to adeptly handle the game of stock option investing.
