In Investing, Money

Investing Series: What do ‘stock options’ really mean?

This is a part of the Investing Series.

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Stock options are what people (mostly executives) are either paid with in lieu of salary, or the action of the stock is offered to employees of the company at a fixed or discounted price.

IT DOES NOT MEAN THAT YOU OWN STOCK!

Having stock options simply means you have the OPTION to buy it at a lower rate (or fixed company price), and/or take it as part of a salary.

That’s basically all there is to it!

For executives, instead of getting more money per year, they may ask to get stock options in the company, or the ability to buy at a lower rate.

This is supposed to be an excellent motivator for people to work harder to make their investments in the company rise, and to also decide to invest their money in the company itself, by buying stock.

When I worked for companies (both public and private), they told me on my first day I could buy stock in their company at a discounted rate of 10% after I had been with the company for a year.

I AM CONFUSED. STOCK OPTIONS MEANS YOU DON’T OWN ANY STOCK ITSELF?

No.


Stock options means you have the OPTION to buy the stock for cheaper (at a fixed rate, or discounted rate).

When you exercise your stock options, it means you buy the stock at the discounted rate by exercising your right to purchase them for cheaper.

Companies give you a set amount of stock options, and you can only buy that set amount.

For instance, if you are given 100 stock options, you can buy up to 100 shares in the company at that fixed or discounted rate.

WHAT IF SOMEONE WANTS TO BUY THAT STOCK?

They can then “exercise their stock options” to buy the stock, assuming of course, they are allowed to at that given time (e.g. the vesting period is over), to purchase it.

Let’s look at Amazon:

Amazon-2-year-stock-options-yahoo-finance-purchasing

I had to go back to January 11th 2012 to find Mr. Jonathan Rubinstein who purchased 68 shares at $177.23 per share, for a total of $12,051 dollars.

WHAT IF AN SOMEONE WANTS TO SELL THAT STOCK?

If you are a bigwig at the company (an executive) It is reported to the SEC (Securities and Exchange Commission), and it is usually noted on every company profile how much each member may or may not have sold in terms of stock.

Let’s look at Amazon:

Amazon-2-year-stock-options-yahoo-finance-purchasing-exercising

As you can see, Jeffrey Wilke sold 2500, 1702 and 12098 in Amazon stock since May 14th 2013, totaling around $4.3 million dollars back into his pocket.

(If you take a look through that list, there’s been a lot of selling as of late.)

HOW DO YOU GET STOCK AS A GIFT AS AN EXECUTIVE?

Photograph-Travel-Macau-Asia-Mural-Painting-Chinese-history

They may not necessarily give you stock itself as part of your salary, but on occasion they give you the opportunity to buy more stock by issuing or giving you more stock options that you can exercise in the future afte the vesting period is over.

This action is noted as: “Option Exercise at $0 per share” in transaction filings.

It just means that you give someone a set amount of stock options, but these stock options will not become payment or salary until a certain amount of time (also called a ‘vesting period’) has passed.

So for instance you give someone 10,000 “option exercises at $0 per share”, in maybe 3-4 years or however long the company vesting period is, they will be able to exercise those options and buy 10,000 shares at that fixed or discounted share price.

Let’s look at Amazon again:

Amazon-2-year-stock-options-yahoo-finance-exercise-$0


As you can see for instance, Shelley Reynolds was issued 1405 stock options that she can decide to exercise (or buy stock of), in the future after the vesting period is over.

Same with Andrew Jassy, Jeffrey Blackburn and Diego Piacentini, all executives at the company. 

IS THIS A BAD OR A GOOD THING WHEN EXECUTIVES SELL STOCK?

On the one hand, investors consider it bad when an executive sells stock. It’s a signal to them that they as “insiders” may know that the company is about to take a hit, and are trying to get out before the crash.

Or they think that the stock has peaked.

On the other hand, maybe they just want the money to buy a nice big yacht, or a new home.

WAIT, WHAT IS AN “INSIDER”?

It’s someone who works there. They’re INSIDE the company, and know what goes on, on a daily basis, and are therefore “insiders”.

Photograph-Travel-Macau-Asia-Mural-Painting-Chinese-history-2

The biggest insiders are ones who own the most shares like executives of the company, and when they sell stock (a.k.a. “exercise their stock options), it is only fair that it is reported to investors that they are doing so.

Talk about having your finances out in the open!

SUMMARY

  • Stock options are not stock, it is just an option to buy it at a lower or fixed rate
  • When you exercise your stock options, you purchase stock at that lower rate
  • When you sell your stock, you …sell your stock!
  • Insiders are people who work at the company (usually executives)
  • Everything major has to be reported to the SEC (Securities and Exchange Commission)
  • When executives of the company sell, it could be a signal of a bad time to buy
  • When executives of a company buy, it could be a signal of a good time to buy
  • “Insiders” are people who work at the company and know of the daily goings-on

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Sherry of Save. Spend. Splurge.

I got out of $60,000 of debt in 18 months using TheBudgetingTool.com. Since then, I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K (savings rate = 85%). I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I also post daily on Instagram @saverspender.

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