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The Basics of Stock Options

The Basics of Stock Options

I’ve been doing a little investigating on investment choices — just idly reading at this point — and here’s what I’ve found regarding stock options:

A stock option essentially means that there is an agreement in place between two parties (usually the company and an individual) that allows the individual to buy the stock at a certain price if they choose to do so.

In the case of employee stock options, employees have the opportunity to buy several shares at a certain price. This price is set regardless of the stock value on the open market! This can be a good deal if the price for stocks as an employee is significantly less than normal. There may be restrictions on the deal, however, which can be a downside. Another potential downside to stock options, (particularly employee stock options) is accepting them instead of other compensation. Also, accepting them in exchange for reduced compensation. If you do that, you’re essentially gambling that you’ll be able to sell the stock later for a profit. If you exercise your options, that profit will be worth at least as much as the time and effort you gave in exchange. It could be a lucrative deal! However, since it is a gamble, it could also mean that you get little to nothing for your effort. You could possibly even lose money. In short, stock options are risky. However, this is not something I’m interested in right now. I did once have some employee stock options, but those were contingent on the company going public, which it never did.

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  • Another thing to remember with employee stock options is that you first need to Buy the actual stock. Then generally you have to hold on to them for a period of time, after which you can sell them. So in order to make money, which in itself is not guaranteed, you first need to spend it. Or you can trade on the stock options market, of course. Not to mention that employee stock options generally don’t mature for a few years, and then you only have another few years to exercise the options, or you lose them.

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