(above).Stock option Frequently Asked Questions
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What happens when I exercise stock options?
If you've vested shares of a stock option grant, you have the right to exercise (To make use of a right available in a contract. For example, if an employee holds a vested stock option grant, the right is exercised when the employee purchases the corporation's shares at the agreed-upon price designated in the contract (often referred to as the strike price).) the number of shares that are vested (The amount of retirement benefits or stock options to which an employee is entitled, usually based on length of service.). That means that you agree to purchase shares of your company's stock at the strike price (The price at which a stock can be purchased as defined within a stock option grant. For example, if an employee holds a stock option grant to by 10 shares of XYZ at a strike price of $50, the employee can purchase shares of XYZ for $50/share even if the stock has a market price of $100.) of your option grant. When you exercise shares, you can either sell the shares immediately and collect the cash proceeds less any income taxes, or you can use cash to buy the shares at the strike price and continue to hold those shares of the company's stock.
What happens if I sell the shares right away and receive cash proceeds?
When you sell the shares, you get the cash proceeds from the transaction. For example, if you hold 100 vested stock options with a strike price of $50 and exercise them today with a market price of $100, you'd have the following proceeds:
[100 vested shares X $100/share (current market price)] û [100 vested shares X $50/share (strike price at which you exercise the option to purchase shares)] = $5,000 net proceeds (before taxes).
Remember, your employer may automatically deduct income taxes from your net proceeds.
What happens if I exercise the options, but decide to buy and hold?
Rather than receive cash proceeds from exercising the stock shares, you can perform a ôbuy and hold.ö YouÆll need to have enough cash available in another account (for example savings, checking, or associated cash accounts with a broker) to purchase the stock shares at the strike price. For example, if you hold 100 vested stock options with a strike price of $50 and the current market price is $100/share, youÆd do the following:
First, you need $5,000 in cash to purchase the 100 shares at the $50 strike price (100 shares X $50/share= $5,000).
Second, if you hold non-qualified stock options (Stock option grants that corporations issue to employees as a form of compensation. A non-qualified stock option grant allows the employee to purchase a certain number of shares of the corporation's capital stock at a stated price within a specified period of time. Gains realized on the exercise of these options are treated as ordinary income in the tax year in which the options are exercised. The employee is responsible for paying any income taxes incurred as a result of exercising the option.), youÆll pay ordinary income tax on the difference between the strike price and the market price of the shares at the time you exercise. In this example, the difference is $5,000:
The market price: $100 x 100 shares = $10,000 minus
The cost of the shares: $50 strike price x 100 shares = $5,000
$10,000 û $5,000 = $5,000 taxable ordinary income. Depending on your income tax bracket, youÆll need to pay anywhere from 15% to 39.6% of the $5,000 in income taxes.
After youÆve paid the strike price and income taxes to your company, youÆll then own the 100 shares of stock outright and can continue to hold them in your portfolio. The $100/share price becomes the new cost basis (The total purchase price you paid for an investment. The difference between what you sell an investment for and its cost basis determines your capital gain or loss. This can also apply to your house; all improvements you make to your property add to its cost basis.) for these stock shares if you sell them in the future.
To add these new stock shares to Money, go to the Account Register for the investment account in which you plan to store the shares. In the transaction form at the bottom of the screen, click New, and then create a Buy activity. Using the example above, you'd enter $100 for the price and 100 for the quantity.