Understanding Stock Options: What You Need to Know

The Basics of Stock Options

Stock options provide employees with the right to purchase company stock at a fixed price for a set period of time, typically within a certain number of years. This can be an attractive form of compensation for employees, as they have the potential to benefit from any increase in the company's stock price.

Understanding the Terms

When an employee is granted stock options, they are given the opportunity to purchase a specified number of shares at a predetermined price in the future. This price is known as the strike price. The employee can exercise their stock options by purchasing the shares at the strike price, even if the current market price is higher.

Benefits for Companies and Employees

Companies can save money by offering stock options as part of employee compensation packages. It aligns the interests of employees with shareholders and can incentivize employees to work towards the company's success. For employees, stock options provide the potential for financial gain if the company's stock price increases.

Risks and Considerations

While stock options offer the potential for financial gain, there are risks involved. If the stock price does not increase above the strike price within the option period, the options may expire worthless. Additionally, employees may be subject to taxes on the gains realized from exercising stock options.