EDITOR'S POST
How do stock options work?
Q. How do stock options work?
A. Many publicly traded companies offer stock options or employee stock ownership plans (ESOPs): in a typical plan you're allowed periodically (typically, once a year) to spend part of your salary (typically 5%-10%) to buy stock in the company from the corporate treasury at a 10%-15% discount from the current market price (or the lowest price over some period). You can sell the stock at a profit, or keep it. In a common variation, you may purchase a certain number of shares at a fixed price (such as the market price at the time the option is granted) which may be below the market price at the exercise time by much more than 15%, if the stock has appreciated. If the stock depreciates, you don't exercise the option. Many companies also have dividend reinvestment plans (DRIPs) where instead of receiving cash dividends on the stock you own, you receive more shares of the stock.
Some companies have a lock-up period, during which you can't sell the shares received through an ESOP (typically 6 months). If you're intent on exercising the ESOP and circumventing the lock-up period, your stock broker may help you sell your stock at a price comparable to the current market price, to be delivered after the lock-up period. Even if you don't want to take the risk of holding the stock that may go down in price, there's seldom any reason not to exercise the stock option to the maximum allowed if you can sell the stock immediately at a profit.
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Posted by: Editor at July 5, 2005 06:54 AM