Make the Most of Stock Options: Planninghttp://www.fool.com/personal-finance/general/2007/02/08/make-the-most-of-stock-options-planning.aspx Dan Caplinger (TMF Galagan)
February 8, 2007
While receiving stock options as part of an overall compensation package is generally perceived as a benefit available only to wealthy executives, a number of companies offer stock options to employees throughout their organizations. As you saw in the first part of this article, stock options can be beneficial to both employees and their employers. In determining the best way to use your options, however, you have to understand the way they're treated for tax purposes. Once you get the gist of how stock options work, you can then turn to the question of how to integrate them into your financial plan.
In the most extreme example, you could lose not only your job but also much of your portfolio's value if your employer suddenly went out of business. Just as many employees at Enron suffered doubly from that company's collapse -- they were no longer receiving salaries, and the company shares in their retirement accounts became worthless -- large holdings in stock options make it difficult for you to diversify your portfolio to reduce your risk.
Not all financial planners agree that a concentration of employer stock in your portfolio is necessarily a bad thing. You probably understand your own employer better than any other company whose stock you own, so you may make better-informed decisions about your employer's stock. However, if your job doesn't give you information about everything your employer does, then the partial picture you have of your company's financial situation may be misleading. The typical advice you'll receive is to take opportunities to broaden your portfolio when they arise.
Benefits of early exercise
In addition, exercising shares early can help you manage your tax liability. If your options create tax liability when you ex