What is a Stock Option

What can Stock Options Do?

Stock generally presents a small portion of ownership inside of a company. A stock option, by definition, is a small number of stocks offered to the investor at a reduction in price. As far as an employee is concerned: the stock option presents a way for the worker to become involved in (again) company ownership. The stocks, respective to stock options, are offered at a (substantially) lower price than the market value of the investment vehicle. Stock options can be made available to outside or third parties in way of a contract.

The price of options sold to employees is referred to as a strike price. The period of time options may be purchased by employees is generally predetermined by the organization. The time wherein employees are granted the privilege of purchasing company stock is referred to as: a vesting period. The vesting period can last as long as several years.

The investor, in this case the employee, has the right to exercise his or her option during the vesting period. Stock options present to employees a way to acquire assets that can prove to be of significant value at a future date. Offering stock options increase employee morale, since the worker feels more involved in the operations of the company.

A company which is performing well is doing employees a favor by offering stock options. A vesting period that proves considerable in length provides the employee time to save his or her money; and a way to invest in company stock at a price below market value; or level with it.

Stock options prove convenient for (company) employers in that the financial vehicle reduces the employee “revolving door syndrome.” An employee, naturally involved in the company’s activities; as it pertains to overall financial performance feels more vital and part of the team when placed in a position where he or she may purchase company stock. Again, a very agreeable aspect of stock option purchase is affordable pricing: The price-point (once again) is generally set wherein the employee is able to easily invest. Employee shareholders get on the same page more readily with that of the organization where they work.

Options may be purchased at a controlled price during a certain period: The market is not considered when establishing the option price. You are under no obligation to exercise your option. If you do not exercise your option, the option contract becomes of no value at the end of the specified time period. For those readers not familiar: exercising a stock option means you exercise your right to purchase shares of company stock at the preset low option price-point. The ideal time to buy a stock option is when the difference between the market share price and grant price is greatest or most substantial.

Two terms are important to remember when it comes to stock options: a) Call option; and b) Put option. A call option is the option wherein the contract holder has a right to purchase stock, at a particular price within a stated period of time. We have, for the most part covered the call option within the body of this article. The put option is generally included within the option contract and makes it possible for the holder to sell, at a predetermined price within a stipulated period of time. Ideally, it is best to sell when the preset price exceeds that of market value.