Discover 8 Tips For Option Stock

Introduction

Stock option is the right to buy a specific number of shares of companys stock provided by the employer to employee during a time and at a price that employer specifies. Now what is stock? Stock is a security or certificate that represents ownership in companys stake. The purpose underlying the stock option is to attract and keep the talented workers and to compensate skilled workers. This has a great impact on employees motivation as well because they feel like owners of a business interest. Increased motivation results in increased employee performance which in turn leads to increased profits.

Step 1

Stock option is usually offered at market price at the time the option is offered. but in some cases it is below market price which gives the employee an option to sell stock option and earn a gain. In this case, gain is calculated by the difference between the amounts received by selling the option and the amounts paid at time of buying the option. It has an additional advantage that the gain is not taxable.

Step 2

Employee can exercise the stock option at any time according to his own choice. but the best time to exercise the option is when value of stock has gone up. In this case, a person can purchase the share at the market price and then sell them for a profit. but if there are high profit prospects that is. there are chances of increase in share value, he/she can hold them for a longer period.

Step 3

Employees who are granted stock option should have knowledge of the fact, whether company is traded on a stock exchange or not. If the company is traded on stock exchange the buying and selling of companys stock becomes legal and it gives a security to employees to get paid in the event of liquidity.

Step 4

Employees should not accept stock option as compensation of lower salary as these options ends up getting taxed as capital gain. Gain/loss arising from exercising the option is capital gain/loss. Capital gain is taxable but capital loss is not allowed as deduction for tax purposes.

Step 5

Where stock option offers tax disadvantage to employees on one hand, it offers tax advantage to the company on other hand. Options are shown as worthless on company books until they are exercised.

Tips

If a company starts giving stock option too easily, investors do not give value to such stock. This in turn leads to decrease the value of stocks stake which ultimately results in loss. Evaluate the value of Option Stock. This can be done by considering number of outstanding shares. Outstanding shares are the stocks that are held by people other than company.

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