Stock Options Explained

Stock Options Explained

If stock options explained is what you’re looking for, then you’ve come to the right place. So here we have it; stock options explained for you in full detail to give you a better understanding of exactly what stock options are.

Stock options are where two parties have agreed upon the right to buy a specific number of shares which will be at a time and price that has been agreed upon by both parties in question.

As the buyer of the stock you’re hoping that the stock itself is under-priced, and that it is likely to increase In the future. As the seller of the stock you’re hoping that the stock does not hit the price quoted.

The buyer wants the price of the stock to go higher than the cost of buying it, with the additional cost of the option. The seller on the other hand will profit either way, whether the option hits the price or not, as they will either gain from the selling of the stock, or they will make money from the cost of the option.

This may be slightly confusing, so here is stock options explained in a more plain and simple manner.

Company A’s stock price is $40, the investor will buy the option on Company A with an expected price of $50, with the cost of the option being $5. If the price of the stock for Company A rises above the cost of the option which will be $55 (The $50 for the stock + $5 for the option) then the buyer will sell the stock for a profit. On the other side, the seller will benefit from the increase in the stock from $40 to $50 and the $5 from the option, and even If the price is not reached, the seller still receives his $5 for the option itself.

In the past it used to be that these stock options were only available to the very top tier of executives working at a firm. Nowadays, however, these options are often offered to new employees upon first joining a company at a set price. A lot of people want stock options explained to them as they will often see adverts for jobs which have listed this as a potential perk to new starters.

There are many reasons for a company to offer these stock options to prospective employees, usually because they want to be able to offer a future employee something more than their annual salary, and they want them to feel like part owners of the company, and give them drive to work harder as they themselves have a more vested interest in the job.

There are important differences between stock options in America and Europe. European stock options can only be redeemed at the expiration date of the offer, whereas American stock options can be redeemed at any point from the purchase date up until the expiration date.

This article should have stock options explained completely to you by now, and if it hasn’t here is a summary. Stock options are simply the option to buy stocks (as the name suggests) for a certain price that has been agreed upon, within a set time period.

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