Define Stock Option
Stock options are often granted to executives of companies but can be awarded to regular employees as a part of a compensation package. They give the recipient an opportunity (or option) to buy the company's stock at a future date for profit.
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Basics
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Stock options are awarded with an exercise price (typically at or near share price at time of issuance) and expiration date. The holder must elect by the expiration whether to exercise (buy) his stock options. When the current share price for company stock is higher than the exercise (buy) price of stock options, the holder can exercise his options and sell for profit on the difference.
Purpose
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Stock options are usually awarded to employees as part of a total compensation package to encourage commitment and a sense of ownership. Options are often vested over a period of time to reward employees for reaching milestones with the organization.
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Benefits
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Along with loyal employees, stock options allow a company to use equity promises as a way to moderate cash compensation. This improves cash flow and helps growing companies continue to expand. This inherently benefits the stock option holder since share prices rise with company growth.
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References
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