Hey Fools! My wife was told that she would receive 1000 shares from her company in stock options. How does this work? I assume this is a good thing!? This is very new to both of us as we have only been investing with DRIPS and index mutual funds. What do I need to know about the 1000 shares? What questions should I be asking.? I read a section on this site about stock options, but it didn't give me the information at"least I thought I was looking for!" What are some good sources for me to become a well informed Fool? Sorry for being so vague!
The Fool has info on employee stock options at http://www.fool.com/FoolFAQ/FoolFAQ0049.htmandhttp://www.fool.com/school/taxes/taxes24.htmWhether this is a good thing depends a lot on the company. There are a lot of dot-com employees with worthless stock options -- not so great to have an option to buy the stock at its IPO price of $25 when the current value is $10 or less.Read the Fool section again, and read the info your wife receives carefully. Your wife has not received 1000 shares -- she has received (or will) an *option* to buy up to 1000 shares at a specific price. For example, if the current stock price is ranging $30-40, she might have an option to buy shares at $25. You and she have to come up with the cash to buy the shares. (There is a cashless method, in which you basically sell enough shares to cover the cost of buying the remaining shares.)You might want to talk to an accountant for help with the tax consequences when you exercise the options.
K102,RiverCity gave you a very good response to your post. I wanted to add a few points more from a business perspective.First, we don't know if your wife works for a public company or not. If the company is private, there may not be much of a market for her shares if she were to exercise her options.Second, most companies give out stock options as an incentive to get their employees to work harder or smarter. That said, the options' strike price, or price which your wife must pay to exercise her options and convert them to shares, will almost certainly be at or higher than current market price. If they were below market price, they would provide no incentive - and they would have to be expensed by the company in its current financial statements. Not a pretty picture from the company's perspective.Hope this helps.WNL
WNL says: "the options' strike price, or price which your wife must pay to exercise her options and convert them to shares, will almost certainly be at or higher than current market price. If they were below market price, they would provide no incentive - and they would have to be expensed by the company in its current financial statements."This hasn't been my experience, but experiences vary. In a typical stock option plan, employees are granted the right the purchase a certain number of shares of the company's stock, at a certain price, over a certain time period. This price may be lower than the current market value of the stock at the time the option is awarded.There are tax consequences, of course, for both employee and employer. Tax treatment of the options depends on whether they are "non-qualified" or "incentive stock options". With non-qualified options, the employee realizes regular income when exercising the options -- the income is the difference between the stock's price on the day of the exercise and the option price, and the employer is entitled to a compensation deduction for the same amount. With incentive stock options, the profit can be deferred until the stock is sold and will be treated as long-term capital gains if the employee retains the stock for 18 months or more. More info:http://options.about.com/library/weekly/aa031201a.htm
If the company is private, there may not be much of a market for her shares if she were to exercise her options.If the company is private, the company's stock may be restricted by the SEC and it may even be ILLEGAL to sell.
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