Stock Options For Dummies

[candyrain]

The company I work for offers stock options. I received a packet today with papers which I don't think I totally comprehend. What exactly are stock options? What do I get if I buy them? How about the downsides? What are the risks? Any expert in the house willing to enlighten ignorants like me? :D

[lupuS]

Stock options are privileges to buy stock at a predetermined price. This privilege could be worth money. Don't throw those papers away.

Let's say stock in your company is trading in the market at $50 a share. Let's also say that you hold options to buy 1000 shares of the stock at $20. You could say your options are worth $30,000 - calculates as (50-20) x 1000.

Of course, to get this profit, you must exercise the options. This is done by buying the shares. After you buy them, you then sell them at a profit. In practice, the selling and buying are done almost simultaneously.

Companies usually give stock options as a form of compensation. Instead of giving you a bonus of $30,000 this year, for example, your company could instead give you the options. Today they would be worth as much as the bonus. But if the price of the stock rises, your options also rise in value. Companies like this idea because employees who hold options tend to hang around and help make the company profitable so that the stock price goes up. Nice motivational tool. Also, the cash they would have otherwise used to pay your bonus can now be spent on other things like rent, R&D, advertising, or a new Lexus for the boss. ;)

There are some things you need to watch out for when given options:

a) they often have an expiry date - if you do not exercise by a certain date, the option evaporates.

b) they can also fall in value - if the market price of the stock falls, your options might become worthless and you will end up wishing they paid your bonus in cash instead. I think the guy who invented the phrase pera na, naging bato pa might have had some options on falling stocks.

c) stock options might be taxable, even when unexercised - it is best to check the papers which came in your packet. There is usually some tax information there.

[zimdude]

Not common in the Philippines, is it?

[Stampede]

given the current state of the global economy, this type of stock option would not be attractive. There seems to be no end in sight to the dropping stock prices. On the other hand, some people think that stock prices have bottomed out. so if you hold on long enough, maybe you'll be in the money (right term?) if and when you exercise the options.

right now, personally, i'd prefer to get the other kind of option -- put options or the privilege to sell as opposed to the more common 'option to buy' (what you're getting candyrain). Sheesh, i get stock options too but i got them at the wrong time. and as they say timing is everything...

my finance knowledge is a little rusty. Maybe lupus can shed some light on this.

[NoisyCricket]

i guess it's just another way to raise money FROM its employees :lol: . So in effect you are funding the business you are raising. Ask yourself siguro about the track record of your own business.

How long has it been in operations? Has it made a profit? (believe me this is not a ridiculous question... some companies have been known to offer stock options to its "subscribers" .. they just don't tell you that the company is actually dependent on these new "capital infusions"..)

What is its track record? How is the management? Do you have faith that the foundation is good, and the business plan well conceptualized? If you did not work for the company and were an outsider looking in, would you invest?

What industry is your company in? How is the industry doing? Slump?

If you are going to be an investor in your own business, then you have the RIGHT to know what is going on.. get the real facts. Businesses have two books. The audited and the real steel (steal?) deal.. If the prospect looks bleak, don't go for it.

Don't just buy and pray the stock goes up. Don't take the word of your boss face value, or buy his or her "pie in the sky" hopes unless he or she has the figures to back up his or her figures. Is your boss investing? :lol: If they aren't, ask yourself why. :D

Speaking of stocks, I've got a DFNN credit card.. you know.. the type which gives you 100 free stocks of DFNN. I haven't activated it yet, nor claimed the 100 free stocks. Why? Well for one thing, DFNN sent me this letter that says "You can create your online brokerage account by any of the firms listed below... (dami pang company)... so tumawag naman ako."

Sabi ng broker, "Ahh sorry, wala pa kaming online facility na ganyan. Sorry."

Wot da hell? :rolleyes:

[skyz]

my brod who works for accenture is currently based on chicago for a month-long project, while he's there, an envelope containing pertinent documents from their office arrived in our house. It happenned that those documents contained information about the "shares" that the company granted to my brother. I read through the documents and I can't seem to comprehend much on it (with permission of my brod of course :)

Is there anyone from accenture who might be kind enough to explain those things? :D

[candyrain]

Thanks for the posts, guys. I am enlightened - a bit. :) So I can opt to buy or NOT to buy them, right? I'm going over my papers and I noticed "full vest" with a corresponding amount appeared a million times throughout the document. meaning? will that be the full yield or value of my stocks? is that it? :confused2:

here are a few more of my questions, in line with your explanations:

1. so let's say i buy stocks and i resign after a few months. do my stocks get liquadated and do they give me whatever I have earned? or are they nullified?

2. is this salary deducted? or do i personally make the payments? the options are in dollars.. so do i personally check my payments.. in dollars? :confused3:

3. the stocks can't be resold, according to the papers. is it still advisable to buy them, if the arrangement is like this?

4. my company is in I.T. is there a way I can monitor how it's doing financially? these information is not really available to employees..

5. do you know of any resources online VOID JARGON AND DIFFICULT LANGUAGE where I can gather more info about stocks?

again, thanks!!!:butter:

[almondeyes]

wow.what company are you in ba?bihira dito ang nagbibigay ng stock options e.I was with a company before and they told us that they are going to give us stock options daw pero until I resigned e wala naman nangyari.I think stock options binds you to the company, syempre its their way of telling you na you have to work hard para maging productive yung company, you are a part owner of the company so la kang choice kundi pag butihin mo *** work mo kse naginvest ka na sa kanila.:D

[almondeyes]

to monitor your stocks you can go to yahoo, there's this portion about stocks but first you should know you company stock symbol (i.e.MSFT for Microsoft), you should know also where it is listed most IT companies are listed in NASDAQ and NYSE, you can also go to www.avidinvestor.com or you can try www.ragingbull.com, in raging bull para lang syang pinoyexchnage na business type lang and they have quotes there.:p

[candyrain]

thankie almondeyes!! but.. what's NASDAQ and NYSE :blush: I used to write for an I.T. publication and I encountered this a lot. hee hee... but I never got an explanation what they are.

(I DON'T KNOW A LOT OF THINGS!!!) :scream:

[lupuS]

Responding to a comment by Noisy Cricket:


i guess it's just another way to raise money FROM its employees.


This is true only if the company awards options for NEW shares. Typically, option shares are purchased by the company from existing shareholders. If this is the case, no new money is raised for the company from the employees.

[lupuS]

Responding to a comment re PUT OPTIONS by Stampede.

Put options can provide profit opportunities in times when the price of the stock is falling. They have value when the exercise price is greater than the market price. The trick is to exercise the put when this situation arises.

But what if you already hold options of the first kind? Puts are still useful to hedge, or protect, your position. Let us go back to the illustration i earlier posted. Supposing you hold options for 1000 shares at $20 and the market price is now $50. Your options are in the money now, but you prefer to hold on to them.

If you wrote (bought) put options for 1000 shares at, say, $21, you could then sleep at night knowing that if the price dives to anything lower than $21, you can sell your shares at $21 guaranteed. If the price rises again above $21, your put options are worthless, but you are making money on the original option.

[lupuS]

Responding to some questions by candyrain.

1 You are not forced to buy the shares. That's why it's called an option.

2 Typically, the only reasons you actually need to buy the shares would be a) you want to cash in your profits, and need to have the shares to sell; or b) the option will expire and you want to hold on to the shares after the expiry date. Otherwise, it makes little sense to buy the shares.

3 The stocks can't be resold - except to the company. This is a usual restriction. Check the fine print and ask for an explanation about this.

4 An option holder is in many ways a stockholder. As a stockholder, you are entitled to know about the company you own. If they don't give you financial information, ask for it.

[almondeyes]

Nasdaq is a trading market, like Phil Stock Exchange .
( www.nasdaq.com), NYSE stands for New York Stock Exchange.

[Stampede]

good answer Lupus! we've got an options trader in the house.

Candyrain, vesting refers to the percentage of an account or benefit that you have earned, usually based on your length of service in your company. usually sasabihin sa yo kung kailangan (in x number of years) ka magiging fully vested (100 percent). has nothing to do with the value of your holdings.

[ahock]

KuyaDanny and Leigh

I know you two are really experienced when it comes to this.

Our company gave us this stock option as part of our benefit. Well this is different to ESPP (employee stock purchase plan). Here they only gave us XXX shares vested for four years and excersisable every quarter.

Question how does our company earn from this. All I know is that in ESPP you'll going to buy certain number of shares at a certain price and thats it its your already. You'll have to wait for it to profit or gain some price. But on our case they haven't asked us any amount or any single cents for it (kaya nga stock option eh).

Pls. if you have time to explain this stocks blablabla or the thing in it.

[KuyaDanny]

These are how your company stands to benefit by granting you stock options:

1) Let's say you received options to buy 1000 shares at P100. Further, assume that the market price of the stock today is P200. Your profit, if you exercised the options and sold the stock today, would be P100,000 (calculated as (200-100)*1000).

In effect the company paid you P100,000. If they paid you P100,000 as a salary or a bonus instead, they would have to deduct the P100,000 as an expense. In the case of stock options, they don't. So their profit figure is higher.

2) Since you are in effect an "owner" of the company, your company believes that you will always work towards increasing the company's profit and in the process raising the value of the stock you "own". This is sometimes better than paying your more salary, especially if in the process of doing your jobs you make decisions that are detrimental to overall profitability.

[coRinthian]

Well- stock options could be a gold mine.... or a worthless piece of paper- depending on how well your company performs, and the economic climate.

the value of stocks (and stock options) fluctuate- and there is no assurance that you will have a definite return on them (ex: The dotcom frenzy and crash)

Think of it as a risk- on your part.

Well, the potential returns are great, and you- as a shareholder- will be motivated to perform your best to make the company grow- ergo- fuelling the value of your stock options.

[jpljon]

stock options if you exercised it can be forced savings on your part. after you have fully paid for it and decide to sell it, the company has first option to buy at market price. by then the market price could be lower or higher than what the company offered to you at first.

:cool:

[batang uliran]

Stock options in the Philippines have yet to catch up with stock options in the U.S. This is because local options have too many restrictions such as lengthy holding periods (sometimes lasting several years), small discount to market price, and limitation of option awards to only top executives.

[ahock]

Thanks Kuya DAnny, well I do understand all your comments. Thats what actually we're doing here.

My question is In the case of stock options, they don't. So their profit figure is higher. this statement. I really dont understand this. parang nagbigay sila ng pera right?????

[KuyaDanny]

Note: I merged this thread with an earlier one on stock options.

Think of it this way:

If they paid you salary or bonus, it would be a company expense. If they gave you options which were worth the same amount, you got the same amount of money from the market, not necessarily from the company.

[ahock]

Thanks Kuya Danny

Another question: Pano ba nila nadedetermined yung number of shares sa company? Say syempre yung owner ang may pinakamalaking shares diba???? What does IPO means and how does it works????? Pano mana nagwowork yung split at sino decide? Last kuya market price ba ang deciding factor kung malakas yung company say per share 50 dollars compare to 2 dollars per share???? Sorry if I ask to much ;) :D

[Fish]

Number of shares...

When investors buy stock, or shares, they own a part of the corporation that issued, or created, the stock. A stock investment is also known as having equity, or an equity position. In general, the extent of equity that specific investors have in a corporation is measured by the number of shares they own. Needless to say, the corporation that issued the the stock owns the greatest volume.

IPOs...

To take a company public, which means making it possible for investors to buy the stock, the management registers the stock with a regulatory body, and makes an initial public offering or IPO.

How IPOs work...

If a small company finds its product or service in great demand, it quickly outstrips the ability of venture capitalists to provide money for rapid growth. That's when it decides to offer shares to the public.

The company goes to investment bankers who agree to underwrite the stock offering -- that is, to buy all the public shares at a set price and resell them to the general public, hopefully at a profit. They sometimes also organize meetings between the company's management and large potential investors, such as managers of pension or mutual funds.

The underwriters help the company prepare a prospectus, a detailed analysis of the company's financial history, its products or services, and management's background and experience. The document also assesses the various risks the company faces.

Stock splits...

When the price of a stock gets too high, investors are often reluctant to buy. Corporations have the option of splitting the stock in an effort to stimulate trading. When a stock is split, there are more shares available at a more accessible price. Stocks can split three for one, three for two, ten for one, or any other combination.

That doesn't mean, however, that the value of the underlying asset has changed. If the company declares a two-for-one split, it gives the every shareholder two shares for each one held. At the same time, the price per share drops to half. An investor who owned 300 shares now has 600 -- but the market value is still the same.

In a reverse split, you exchange more shares for fewer -- say ten for five -- and the price increases accordingly. Reverse splits are sometimes used to raise a stock's price in order to attract institutional investors such as mutual funds and pension funds that may refuse to buy stock costing less than their minimum requirement.

[ahock]

Thanks Fish and guys. I'll try to digest this and formulate another question. *okay*