Employee Stock Option Basics: How to Benefit

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Employee stock options are a great way to make a steady investment in your future. Any company that offers employee stock options, is giving you a chance to make easy money. You only have to know a few things to start receiving benefits from your stock options. Go over these employee stock option basics, and learn how to benefit from them.

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What’s an employee stock option?

Many companies offer stock options to their employees. These options are just one of the ways that companies compensate their employees. They pay partially in cash, and partially in benefits like health insurance, and partially in paid time off, sick leave, and so forth. An employee stock option is a benefit like these. The company gives its employees the option to purchase company stock at a discount.

Contribute as much as you can towards stock purchases

If you want to get the most out of your employee stock option, contribute as much as you can towards it. Just don’t put all your eggs in one basket. It’s more important that you max out your IRA and 401k. After these investments, however, put your cash towards your employee stock options. By getting the stock at a discount you can guarantee a proportionally higher profit and smaller loss. This makes your company’s stock a much safer bet than other stocks. It also allows you to benefit from your own hard work. Every time your company’s stock increases, you get that much more benefit. Keep up the good work!

Plan for taxes

One thing you do have to consider is how much of your paycheck is being taxed. Some employers allow you to make your stock purchases with post-tax dollars. Most, however, automatically remove cash from your paycheck during the purchasing period. These dollars aren’t tax-free, but merely tax deferred. If you’re calculating profits on tax-deferred dollars, remember that you’re going to have to pay tax before you access any of that money. Keep this in mind so you don’t sell yourself short thinking you’re going to make a fortune.

What about selling?

Should you just hold onto your company’s stocks forever? Many employee stock option basics plans don’t explain how to use your stocks wisely. While you can purchase the stock at a discount, you should still treat it as other stock that you own in some cases. Keeping a large portion of your company’s stock will be great when you drop a new product. However, if the company goes under or fails, you won’t benefit any more than you would have if you’d never bought the stock at all. Pinning your employee stock option purchases to a price index will help you regularly buy and sell your company’s stocks.

Employee stock option basics only scratch the surface. If you have a good option plan through your company, it’s worth sitting down with an accountant and an advisor, and finding out how to get the best deal from your option. Whether employee stock options are the basis of your investment portfolio, or just something you dip into, getting on top of your choices is key to a great return on investment.

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