What are Stock Options and How Do They Work?

When you work for an employer, there are a variety of benefits you can receive, such as health insurance or a 401k match. Another one of these benefits can be stock options.

A stock option is a contract that allows you to buy or sell company stock at a certain price for a set period.

When you own an option, you don’t own the stock itself—you own the chance to purchase that stock at an agreed-upon price, typically a price that is attractive and lower than the market rate.

Why Do Employers Offer Stock Options?

Offering stock options allows employers another way to attract or compensate employees who believe in their organization and are invested in its success. When people own shares of the company for which they work, they may feel more invested in that company’s long-term success.

How It Works

A stock option allows you to “exercise” the option and own the stock. For example, if the stock goes up in value, you can exercise your option and purchase the stock at the agreed-upon price.

Typically, you are allowed to purchase only a set amount of stock at a certain time, such as after being employed for a year.

There are three stages to stock options. The grant date is when the employer grants the options to the employee. Next comes the exercise date, when the employee decides to “exercise” the option to purchase the actual stock. Last is the sale date, which is when the employee decides to sell.

If the stock loses value or the option expires, you do not have to purchase the stock and can easily walk away from the deal.

Bottom Line

A stock option is essentially a cost-effective employee benefit for the employer that provides value for the employee and inspires them to feel invested in the success of the company. At Aspen Wealth Strategies, we’re here to guide you as you build a balance of savings and investments that will put you on track to building wealth and financial peace of mind.

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