Stock options can be a great perk offered by some companies.
Being offered stock options by your company allows you to purchase company stock at a set price for a period of time. Usually, the price-per-share is reduced. You are also required to hold onto the stock for a set length of time before you can sell it.
As an employee, stock options allow you to benefit from the growth of the company in the long term. Additionally, startups will often offer this option coupled with a lower salary, but bigger companies can offer stock options, as well.
When Should I Purchase Stock Options?
If you have been given the opportunity to purchase stock options, you may want to take advantage of them if you can afford to do so. But you should not go into debt to purchase stock options. Before purchasing, you should weigh the risk, and ask yourself if this is money you can afford to lose.
You should also only purchase stock options if you are confident that the company is going to continue to grow and profit. You should also look at the conditions regarding the stock options and how long it takes you to become vested in the stocks – or when you will acquire full ownership of your stocks and be able to sell them. So if you are planning on leaving the company soon, you may not want to purchase the stocks.
When you purchase stock, you should also plan financially for the tax implications. Some stock options are given as tax-free, and you will only pay a capital gains tax when you sell them. Others are reported as taxable income.
When Should I Not Take Advantage of the Stock Options?
At times, the offered price offered by your employer may not be deeply discounted enough to be beneficial. If the discount is not large or if the current market price has dropped below the amount they are offering your options for, then it is not a good deal.
Be sure to do your research before purchasing stock options through your company or you risk losing money when you decide to sell the stock later on.
And it bears repeating: If you cannot afford to purchase stock options, you should not buy them. For example, you should not go into debt or end up putting a month's worth of expenses on a credit card in order to afford the options.
What Do I Do With My Stock Options Once I Have Them?
Once your purchase stock options, you should set some guidelines about when you want to sell the shares and at what value. While you may want to hold onto a certain percentage of your shares, you may decide to sell some of them if the price goes up to a certain amount.
But remember that is it important to diversify your investment portfolio, so selling might be the best option for you. You can talk to your financial advisor to decide when to sell and when to hold onto your company stock. A financial advisor can also help you decide just how the stock options will fit into your overall financial plan.
As with any investment in the stock market, you'll have times when the stocks decrease in value. Don’t panic and sell them. Just ride out the lows and it will likely go up again. Actually, the biggest danger when investing in the stock market is too have too much of your money tied up in a single company or industry – in other words, not having a diversified portfolio.
Can I Use Stock Options for Retirement Savings?
It is possible to use your company stock options as a retirement savings strategy, but they will not be protected from taxes the way that your investments in a 401(k) or IRA would be.
But here's a way around it: When you own stocks you will receive dividends on the stocks. You could invest the dividends you earn on this stock into an IRA account, which will boost your retirement savings.
However, you should not rely entirely on your stock options as a retirement plan. Be sure to put money in your 401(k) or other retirement savings account, as well. When contributing to a 401(k), you should be sure to contribute at least as much as your employer match, since it's basically free money.
All in all, building wealth and forming a good retirement plan isn't dependent on any one thing. If you want to really build wealth, you need to carefully follow a budget, plan for retirement and invest wisely. It will take time, but it is possible.
Updated by Rachel Morgan Cautero.