These days, companies offer any number of benefits to their employees as a way to keep them happy and attract top talent. One of the ways that companies aim to do this is by offering their employees stock options.
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Here’s how they work:
Companies may offer employees the ability to purchase a certain amount of shares in the company’s stock at a set price at a specific date in the future. The reason this is so beneficial? Imagine if you had this ability, and noticed that the current market price of your company’s stock was much higher than the set price you were required to pay. In this instance, you’d be making money instantly due to the ability to purchase these shares at a deep discount.
To use another analogy, stock options are like getting early access and a discounted price on that coveted designer purse. Though the value of the item may fluctuate, you will be able to make some money as long as you purchase the item (at your discounted rate) while the demand for the bag is high and the price reflects this. Getting a $2,000 bag for a discounted price?…Sign us up for that!!
Here’s a more detailed financial example:
Let’s say you work at a company that offers you stock options. The date they issue you this benefit is called the “issue date”. In your case, they will allow you to purchase up to 100 shares of the company stock after two years of working for them at a price of $100/share. Once those two years are up (your “vesting period”), you then decide to exercise your right to purchase these shares for $100 each (the “grant price”). So, you exercise your right and obtain 100 shares at $100/each because you noticed the actual market value of the company’s stock was $200/each at the time. So, while you only spent $10,000 in total (buying 100 company shares at the discounted price of $100/share), in reality, you EARNED money because the stocks themselves are worth $20,000 (100 shares at the current going rate of $200/share).
Essentially, having stock options can be a great way to earn additional income as long as you exercise the option at the correct time. If stock options are redeemed when the current stock price rate is higher than the specific exercise price outlined in your benefit, then you can gain money on that difference. If, however, you wait to redeem the shares and notice that the company’s current stock price is less than what you’d be required to spend (as outlined in your benefits package), then you would just let these options expire.
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What else do I need to know?
There are two main types of stock options companies issue their employees and each has a different tax-treatment. The two types are: Non-qualified stock options and Incentive stock options. In order to truly understand and prepare for these tax nuances, it would be beneficial to schedule time with a financial planner. During this time, it would be wise to review the specific details of your employee stock option plan so that you can plan ahead.
Additionally, keep in mind that while it is certainly a huge benefit to potentially be able to purchase so many company shares at such a discount, it is always smart to diversify the other holdings in your portfolio. As the saying goes, you never want to keep all of your “eggs in one basket”. If you’re only investing in company stock, you’re not allowing yourself to be protected in the case that something unfortunate should happen to your industry or company as a whole. In order to spread this risk around, you’ll want to work with a financial advisor to diversify your investment approach and portfolio holdings so that you’re not completely reliant upon your company stock to perform.
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