How Do Stock Options Work? A Guide for Employees - Smartasset

With this strategy, you sell just enough shares to cover your purchase of the shares, and hold the rest. You can find this in your contract.

When and how you should exercise your stock options will depend on a number of factors. You would be better off buying on the market. But if the price is on the rise, you may want to wait on exercising your options.

Fallacy 2: The Cost of Employee Stock Options Cannot Be Estimated

Once you exercise them, your money is sunk in those shares. So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now. Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price.

Fallacy 1: Stock Options Do Not Represent a Real Cost

You will usually need to pay taxes when you exercise or sell stock options. What you pay will depend on what kind of options you have and how long you wait between exercising and selling. With NQSOs, the federal government taxes them as regular income. The company granting you the stock will report your income on your W The amount of income reported will depend on the bargain element also called the compensation element. When you decide to sell your shares, you will have to pay taxes based on how long you held them. If you exercise options and then sell the shares within one year of the exercise date, you will report the transaction as a short-term capital gain.

This type of capital gain is subject to the regular federal income tax rates. If you sell your shares after one year of exercise, the sale falls under the category of long-term capital gains. The taxes on long-term capital gains are lower than the regular rates, which means you could save money on taxes by holding your shares for at least one year.

For the Last Time: Stock Options Are an Expense

ISOs operate a bit differently. You do not pay taxes when you exercise ISOs, though the amount of the bargain element may trigger the alternative minimum tax AMT , which phases out income exemptions targeted for low- and middle-income taxpayers. The first thing is one that I already hit on with the vesting period.


  • What Should I Do With My Employee Stock Options?.
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You just need to keep an eye on the vesting period and know what it is prior to making any decisions. Not only do you work for this company, but if all of your investments are also tied up in the company then you are susceptible to some great gains but also some major, major losses. Imagine if you worked at Lehman Brothers and you had a great job and a ton of stock options with the company and then they went bankrupt.

That would be absolutely tragic to your financial situation. My suggestion would be to make sure that you understand the vesting period. If you like the short-term outlook of that company, at least up to and hopefully beyond the vesting period, then take advantage of the stock option opportunity that is being provided to you!

My second most important suggestion is to make sure that you are diversified. Self taught investor since You could invest the dividends you earn on this stock into an IRA account, which will boost your retirement savings. However, you should not rely entirely on your stock options as a retirement plan.

Be sure to put money in your k or other retirement savings account, as well. When contributing to a k , you should be sure to contribute at least as much as your employer match, since it's basically free money. All in all, building wealth and forming a good retirement plan isn't dependent on any one thing.

If you want to really build wealth , you need to carefully follow a budget, plan for retirement and invest wisely. It will take time, but it is possible.

I’m Ready To Exercise My Company Stock Options. What’s Next?

Updated by Rachel Morgan Cautero. Career Advice Career Tips. By Full Bio Follow Linkedin. Miriam Caldwell has been writing about budgeting and personal finance basics since She teaches writing as an online instructor with Brigham Young University-Idaho. Read The Balance's editorial policies. The Balance Careers uses cookies to provide you with a great user experience. By using The Balance Careers, you accept our.