What are stock options?


Quick Answer

Stock options are employee benefits featuring set exercise prices at which employees can purchase shares of company stock within specified time frames, according to the U.S. Securities and Exchange Commission. Employees can profit by exercising their stock options when current market prices are higher than exercise prices.

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Full Answer

Companies may offer stock options in qualified and nonqualified plans to employees, according to CNN. Qualified, or incentive stock options, are generally offered to upper management at exercise prices equal to the current market price of shares. Nonqualified stock options may be offered with exercise prices lower than the current value of a company's stock, and they are generally offered to lower-level employees. Employees can exercise stock options by purchasing stocks outright, trading shares of stock they already own or borrowing from stockbrokers to purchase shares at the exercise price and then paying the loan by selling shares at a higher price.

Companies use stock options to reward employees for good performance, to retain employees who are then more invested in company success, and to attract employees who want the benefit of a contract to purchase stock in the company at a set price, states the U.S. Securities and Exchange Commission. In cases where the current price of a company's stock falls below exercise prices set in employees' contracts, the company may revalue the exercise price to retain employees.

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