Stock options are something we all read about in job advertisements. They are mentioned as one of the benefits the employee is offered. While many people are lured by such benefits, there may be some who do not truly understand what stock options are and how they can return profits. Stock option calculator can help you find out how much profit you can expect, but before that you need to understand what stock options are and how they work.
Understanding the Concept Before Using Stock Option Calculator
With stock options, the employer gives the employee the right to purchase specific number of shares of the company's stock. The time and the price of this purchase is specified by the employer. Stock options have plenty of benefits for the employee. First of all, investing in the company's stock helps you grow with the company's growth. The profits vary according to various factors and that is where a stock option calculator can help in getting a clearer picture.
An Example of How Stock Options Work
Understanding how stock options work is important before you use the stock option calculator. The best way to explain the concept is by giving a simple example. Let’s assume that your employer gave you an option to buy 100 shares of stock at $2. The contract will also mention a date before which the option cannot be exercised. This is called the waiting period. Now, suppose that when that period ends, the stock value reaches $4. You, as an employee have three options now.
You can simply convert the option into stock and buy the shares at $2, wait till the waiting period is over and sell the stocks. By doing this you will have $2 profit on each share.
You can even chose to sell some of the stocks and keep some to sell later. In case the value rises again, the profit will increase as well.
Finally, you can convert to stock but keep all the shares until the value reaches its peak. This is highly unpredictable but if your company is growing at an unprecedented pace, you can make an immense amount of profit just by waiting for the right time.
Yet, despite the uncertainty, it is very important to use a stock option calculator to get an idea of what you can expect.
Why Do Employees Offer Stock Options
Companies, both private and public, can offer stock options. Initially, companies used to offer this opportunity only to their higher level employees. Today, the benefit is usually open equally for all the employees. This is because it creates a win-win game for both the employee and the employer. Some of the reasons why employees offer these options include.
- To attract and retain good resources
- To improve employee's dedication and loyalty
- To hold more cash by offering compensation that goes beyond the pay check
People have managed to gain tremendous amount of financial profits from investing in their company's stock. Make sure you use a stock option calculator to keep track of your possibilities.