By Micheal James

You must have seen the phrase ’stock options’ in classifieds. Several companies offer stock options, in addition to other compensations, to their employees. What are stock options? How are they beneficial to people? How are they related to stock market trading? We will first study the employee stock options and then understand the stock options in stock market trading.

Stock options offer you the right to purchase a specific number of your company’s shares at a specific price. Stock options offer threefold benefit to the company. First, the employees who hold the stocks of the company become stakeholders in the company and therefore have more responsibility. Stock options are useful in retaining good employees. People who hold stocks also feel that they are getting a better compensation.

Strike price is the discounted price of the company shares at the time of offering the facility to employees. As the employee would not exercise his options at the same time, he profits in terms of greater assets as the share prices go up. The negative, that is, the price reduction is possible only when the company performs poorly.

Stock options come with a vesting period. This is the amount of time that is offered to the employee to actually purchase the shares. Either he can purchase all shares at a time or he can purchase them in parts, spread over the vesting period. Vesting period gives you the opportunity to delay the purchase of shares. As you would be purchasing shares at a discounted price, you can purchase them at different intervals so that you get them at lesser price than the market. You can either hold the shares or sell them at the market price through the stock market.

Stock options come with an expiration date. You have to exercise your stock options before the date or you loose your rights over the stock. Stock options are priced at the internal value of shares, thereby allowing you to purchase shares at rates that are much lower than the share market value. If you are leaving the company, you can utilize only the vested options. You lose your rights over the share options that have not been vested already.

Stock options are a sub set of call options. Call option is an agreement wherein the seller has the obligation to sell off some financial instruments, such as stocks, to the buyer as and when the buyer is willing. On the other hand, the buyer is not obligated to purchase the stocks based on the will of the seller. Call options in stock market trading allows a person to buy the rights of, instead of the actual, shares and sell it at whatever price the market offers. Call options are valid only for a certain period. These are useful if you are sure that the share price is bound to go up. Also, if you are holding stock in call options, you will not be getting the dividends on the stock unless you actually purchase it. The bright side is that you own them at a much lower price than the market price. However, you need to sell the option stock within or at the end of the vesting period.