What are Stock Options?

Many a time’s newspapers and job advertisements are known to use the term stock options on a frequent basis. Companies are also known to offer stock options to their directors and other top executives.

However, not all are aware about what is meant by stock options at all. Are they extra profit being given to important employees? What exactly is the company offering to them?

Let’s try and decode what exactly is meant by Stock Options:

Stock options are given to an employee by an employer. The employer actually offers you a right to purchase a prespecified number of the company’s shares at a concessional price.

Here are a few reasons why Stock Options are offered to the employees:

-In order to retain important employees

-In order to incentivize important employees

-In order to attract and motivate important employees

-This is a much exercised option in case of startup business set ups where people want the employees to be retained over a period of time.

The price of the stock option is called the strike price or the grant. In most situations this is less than the prevailing market price of the stock. From an employee’s point of view, they want to actually buy shares of a sound company at a lesser price, hold on to them till the stock prices increase and then sell them to make profit.

From a company’s point of view it makes sense to sell a few shares of theirs at a discounted price which in turn would motivate the employees and make them work harder than before with full motivation.

Many companies have an offer that only above a certain grade one is eligible to opt for stock options. Also these cannot be immediately encased once the stock prices soar up. The stock options come with the hidden norm that the employee has to be with the company for a fixed tenure in order to encase the same. They have to be with the company for a fixed period to enjoy the fruits of stock options.