Whats the difference between stock and stock options?

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Whats the difference between stock and stock options?

In: Economics

2 Answers

Anonymous 0 Comments

When you own stock you own shares of the company that issued it.

An option is a contractual obligation that lets you purchase a certain number of share of stock of the company at a fixed price (the “strike price”) for a certain period of time. For instance, say the stock of your employer’s company is trading for $10 a share. They might grant you an option to buy 1,000 shares for $10 a share in the next two years. This gives you an incentive to drive the share price up during the option term. If the price goes to $20 a share you can buy 1,000 shares for $10,000 and receive stock of $20,000, thus locking-in a $10K pre-tax profit. This is a “compensatory” option because it was granted to an employee/service provider in return for services provided.

There are also market options called Calls which allow you to purchase shares on the market for a pre-negotiated price. With market options you pay cash for the right to purchase the stock, with the hope that the underlying stock price goes up.

Anonymous 0 Comments

Stock is part ownership in a company, if you buy one share of XYZ corp you are technically part owner of the company. You can sell the share at whatever price you want, but you can lose money if you sell the stock for less than the price you paid. Say you buy 10 shares at $100 each ($1000). If the stock price goes to $110 and you sell it, you will have $1100 ($100 profit).

Stock options are an option to buy stock at a certain price. They are often given out as part of compensation and retention bonus for employees at a company. Typically there are one or more vesting periods, 6 months or a year, where you can’t use them. The grant has an amount of options given and a vesting price.

So say you work for ABC corp and they give you 10 shares at $100 over 5 years. So after 1 year you can sell 20% of the shares (2 shares). If the stock price has gone to $120, you can cash out 2x$120 = $240. However if the stock price is $90, the options are underwater (worthless) and you get nothing. However you can continue to hold onto the options and hope the stock price will eventually go back up again.