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Article:

Understanding Stock Options

About Stock Options

           
           
One of the biggest challenges facing employers is recruiting and retaining qualified, dedicated employees. Over the past decade, with unemployment levels low and the economy doing well, one of the ways businesses in many industries were recruiting the best possible talent and keeping those employees happy was by offering stock options. For the first time ever, the trend extended not just to top-level managers and executives, but to people throughout the organization.

As a result, the ability to participate in an employee stock option plan became an integral part of many people's overall compensation package. People who worked for medium-sized to large publicly traded companies, as well as people in startup companies, were among those getting options. Options were also sometimes offered as long-term incentives.

Now that the economy has slowed, fewer people are inclined to accept a job based solely on handsome options packages. However, a responsible company with a sound business plan can still offer its employees a generous and lucrative stock option plan. And there is no less reason today to exercise your options if the company you are working for has realistic prospects for healthy growth.

The trend of offering stock options to employees other than executives began several years ago after Netscape won the initial public offering lottery, setting the stage for a climate that was especially favorable for Internet companies and other startups. These risky startups needed to recruit the best talent away from large, well established companies, so they started to offer the best possible incentives. What could be better than becoming a partial owner of a company with the potential for success? With stock options, employees can both directly contribute to and directly benefit from the company's prosperity.

Stock options give employees the right, but not the obligation, to purchase a predetermined number of shares in the company at a fixed price within a certain period of time. One reason stock options are attractive is the hope that the stock's value will increase, allowing an employee to sell shares at a later date for a significantly higher price.

Many people reap significant financial benefits by participating in stock options programs. So, if you truly believe in your company's potential for long-term growth and success, and you're offered stock options, you should seriously consider taking advantage of this compensation perk.

Yes, some people have become millionaires
Most people have read news stories about startup companies recruiting employees and offering stock options to people at all employment levels. Then, when the company ultimately offered its shares to the public, some people who exercised their ability to obtain stock in the company - and this included even support personnel - became instant millionaires. Yes, this did occasionally happen, more with high-technology companies than with other types of businesses. But even though most people do not typically become millionaires from stock options, your financial outlook could improve if you obtain stock in a company that prospers.

By purchasing stock in a company (exercising your options), you are becoming a partial owner in that company. If the company prospers and the value of its stock increases, you benefit. When you own stock in a company, you're an investor. Thus, the more you know about how the stock market works, the better you will understand how your investment portfolio performs.

Most financial experts agree that stocks tend to be the most financially rewarding investment someone can make as a long-term financial strategy. While maintaining a diverse portfolio is one of the keys to success as an investor, the growth of your investment portfolio can begin when you exercise the stock options you're offered by your employer.

Employers can offer stock options to employees on an ongoing basis, during a specific time of the year, or as a one-time incentive or reward. Based on the type of stock option plan being offered by your employer, you should understand your eligibility to participate in the program, know how the allocation of the stock options works, know what vesting opportunities are offered, understand the valuation of the stock, and determine the holding periods involved.

If you believe your company will experience long-term success before experiencing problems, you might think twice about exercising your options immediately. If the company you hold stock in is likely to have success in the short term, that's when it is advisable to exercise those options as quickly as possible. After purchasing stock, employees sometimes must hold on to their shares for up to several years before divesting (selling their shares - for a profit, they hope).