Employee Stock Options, The Need to Knows

Employee stock options can be quite complicated. Stock options are not as valuable as actual stock. For example, if you receive 10 shares of stock worth $50 per share, this is essentially worth $500. On the other hand, if you receive 10 stock options with the option to purchase at $40 per share, if the stock is worth $50 per share, this is essentially worth $100 since 10*($50-$40)=$100.

According to www.investopedia.com, when your stock options vest, if you decide to exercise the options to obtain shares, you will pay taxes on the value (ie $100 in the example above) as if you received $100 cash (ie ordinary income).

When you go to sell the stock, you will also pay taxes on the gain. This can either be taxed as ordinary income (typically around 25% for most people) or if held longer than a year, taxed as a capital gain (typically 15%). In the example above, if the stock was held for 3 years and the price jumped to $70 per share, you would pay capital gains taxes on $200 since 10*($70-$50)=$200.

In general, if you hold more than 10% of your portfolio in a few particular stocks, you are already exposing yourself to high investment risk. In the case of stock options, when you exercise the options, you will also have to pay taxes in the same year, exposing you to the risk of not having the money to pay the appropriate taxes. You may want to consider this when deciding whether to pay ordinary income taxes or try to hold out to pay capital gains taxes.

This post was reposted from http://finlit.biz/retirement-2/employee-stock-options-the-need-to-knows/, originally written on May 29th, 2014.

Stock Derivatives, Are They Good for You?

Every couple of years, wall street comes up with some new investments.  Every couple of games, Las Vegas determines some new items to bet on, like the length of a super bowl power outage.  Every couple of hours, a new product or service hits the market place as the hot new item.  Should you hop on board?  Does anyone remember what a CDO is or what happened during the sub prime mortgage crisis?

A put, a short, a call.  An option.  A futures contract.  Purchasing stock on the margin.  The further you get away from the actual product you are buying, the more fees and middlemen there are.  Doesn't this mean that there is a larger spread and that it is harder to make money in these areas.

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Do you think you have some advantage that other's don't have?  Do you think you see something that they don't?  Did you know most of the people who invest in these areas tend to believe that they have some edge and that their research is good enough to beat out the competition?

What do you think?  Can you make money trading derivatives?

This post was reposted from http://finlit.biz/retirement-2/stock-derivatives-are-they-good-for-you/, originally written on February 6th, 2013.