The Fool FAQ

Employee Stock Options

The Fool FAQ

I have some stock options from the company I work for. Just what do they do for me, and how do I take advantage of them?

One of the first things you learn when you learn about investing is the goal is to make money. And what better way to make money than to invest in a company you believe in? Stock options help you do just that. They are offered by the company you work for as incentive to do a good job. If you own a piece of the company, you'll naturally want it to succeed.

But how do you go about exercising these options?

Well, that's the easy part. Most companies don't have a brokerage firm for you to go through, so you need to go through your own. The reason for this is stocks need to be purchased by a licensed representative. So, you call your broker and tell them that you are going to be exercising some stock options. They'll get the necessary paperwork going for you, and even will contact your company to expedite the transaction.

The most common way to exercise is the cashless method. Rather than using cash to purchase the stock, you are using margin. Margin departments grant the loan for this purpose because they are guaranteed repayment quickly. This is done without interest being assessed. You borrow the money to pay for the stock purchase. Then, when the shares arrive, you sell enough to pay for the purchase, and enough to pay the taxes. This the company does for you. Generally, the portion you need to sell is small enough that you retain plenty of profit. You can read more about the tax implications of employee stock option plans in our Tax Q&A area: Stock Options

Stock options have expiration dates. The time periods vary and the price of purchase is predetermined. This is what makes stock options attractive. When they are issued, the price is set as to the market price. Years down the road, when you decide to exercise them, the exercise price is generally much lower than the current share price. In this way, you are getting the stock at a substantial discount. Pretty fair incentive.

So, now you are part owner in your company. Makes you want to do a better job, doesn't it?