What Are Stock Awards and Stock Options?
Businesses sometimes grant stock awards and stock options to their employees as a bonus. The value of these investments are tied to the value of the company's stocks. The company may attach requirements for employees to claim the monetary value of these investments.
With a stock award, you receive the company's stocks as compensation. Depending on the type of stock, you may have to wait for a certain period before you can fully own it. A stock option, on the other hand, only gives you the right to buy the company's stocks in the future at a certain price. This way, you can buy the stocks below market price if the stock price increases.
There are several major reasons that businesses grant stock awards and stock options to their employees, according to New York University. Offering these incentives aligns the interests of the stockholders and the employees of the company. Because you benefit if the stock value increases, you might try harder to maximize the company's wealth. Granting stock awards and stock options instead of cash also minimizes the company's expenses and generates tax benefits. Because these compensations often come with certain requirements, businesses often use them to encourage employees to stay longer with the company.
A common requirement of stock awards and stock options is for you to work for the company for a minimum number of years. After this vesting period, you can then claim the monetary value of the stock awards and stock options. This encourages employees to stay with the company. You also have to pay taxes on any gains you earn from stock awards and stock options.
A stock option carries with it the opportunity of great profits if the stock price increases, but it also carries the danger of your options becoming worthless if the stock price decreases. Also, you have to spend money to use the option to buy stocks. With a stock award, you don't have to spend any money to obtain the stocks. Even it the stock price decreases, the stock award would still be worth something. However, stock awards provide less opportunity to earn profits, because most companies grant fewer stock awards than they do stock options, according to "USA Today."