Guide to Employee Stock Options

Some companies will offer their employees stock options on a contractual basis. Usually, employers will provide these stock options to employees privately, and they comprise a portion of the employee’s contract. Employers choose between vested or non-vested stock options for their employees, and employees have to agree to certain conditions regarding stock options.

Long Term Incentives
Employees can’t immediately sell their stock options, rather, they have to retain ownership of the stock options for a set period of time. Employers will usually require that their employees’ stock options be non-transferable. Normally, stock purchases are transferable, but the company has an incentive in creating investors whose stocks are non-transferable.

If employees perform exceedingly well, some companies will offer extended stock options. Some companies will even offer a variety of different stock options to top employees. The company will generally establish the strike price of the stock before offering employee stock options.

Some Advantages of Employee Stock Options
The established strike price allows employees to exercise stock options once specific pricing occurs. This means that employees of the company have a competitive advantage over some other stockholders. The initial stock offering usually determines the strike price of the stock, although different sized companies will usually offer relatively different strike prices on stocks.

Both large, well-established companies and smaller companies offer stock options to employees. Sometimes, small companies will offer stock options to employees so that they don’t have to pay them such high salaries. More established companies generally offer stock options to their favorite employees. They provide stock options as an incentive to keep these employees working at the company.

Extending Your Investment
Long duration periods distinguish employee stocks from traditional stocks. Some companies have built stipulations so that employees can extend their stocks for up to ten years. Standard stocks expire after thirty months. The majority of employee stock options are taxable, although this depends on how the stock options are structured by the issuing company.

Employee stock ownership differs markedly from employee stock options. Companies that offer stock ownership to employees are basically offering a form of a retirement plan to their employees by giving them stock ownership in the company. These terms mean very different things, but are often confused. As an employee, you should carefully analyze stock options so that you are sure about the deal that you are getting.

The NYSE vs. The NASDAQ: When You’ve Gone beyond Money Market Accounts

Since money market accounts are offering very low interest rates currently, many investors are turning to stocks and bonds as an alternative way to earn interest. Many people are unaware that there are some very striking differences between the major market indexes. Here, we’ll take a look at these indexes and explain some of the differences.

Both the NYSE and the Nasdaq contain some powerhouse companies. While you can find some household names such as Johnson and Johnson, Coca-Cola, American Airlines, and many others on the NYSE, you’ll find tech giants like Microsoft, Oracle, and Cisco on the Nasdaq. In general, the Nasdaq tends to contain more tech oriented companies than the NYSE

However, there are some fundamental trading differences between the two.

NYSE
In the NYSE, floor traders who have access to the securities floor bid on trades through an auction market. A specialist is assigned to every single stock in the NYSE. This means that in order to buy a stock on the NYSE, a broker has to either purchase it on a DOT system, or call it in to a floor broker.

Nasdaq
While the NYSE has a physical location, the Nasdaq is a wholly electronic trading market. Market makers rather than specialists oversee stocks on the Nasdaq. These market makers manage the liquidity and trading for each stock. The Nasdaq is run as an Over the Counter trading market, which basically means buyers and sellers are connected to one another via the Nasdaq network.

Brokers still have to place calls to market makers on the Nasdaq network, but all trades are processed through an online system that is sponsored by Nasdaq.

Your broker can give you more details regarding index terminology, so don’t be afraid to ask.

Understanding the Stock Market

Insider information in a stock market is defined as illegal trading by individuals who have access to non-public information and who attempt to profit from such knowledge.  Insider information is a breach of a fiduciary duty and also includes tipping non-public information.  For example, a corporate officer who trades corporate securities after learning of confidential developments would have breached his fiduciary duty, and anyone involved in these transactions i.e. individuals who acted on this corporate officer’s confidential information would also be guilty of insider trading.  The information must be material, non-public information.

Additionally, the SEC requires that if a company intentionally discloses material non-public information, it must then simultaneously disclose that information to the public so that the information is, in effect, no longer non-public.  Security analysts are responsible for compiling information and they often talk to corporate officers and insiders; as such, these individuals must be careful not to cross legal lines as they also issue recommendations to traders.

The Stock Market Index
Stock market indices are methods of measuring sections of the stock market.  Financial services firms cite indices, which benchmark the performance of portfolios.  Global stock market indices, such as the S&P Global 100, ignore where a country is domiciled or traded.  National indices represent a stock market’s performance in a specific nation, which in turn reflects the sentiment of investors of that nation’s economy.  The American Dow Jones Industrial Average and S&P 500 are examples of national indices.  The Dow Jones Total Market Stock Market Index represents stocks of virtually every public traded American company.

There are also specialized indices that track the performance of specific sector within the market.  For example, the Linux Weekly News tracks stocks of companies that sell products based on the popular Linux system.  The Morgan Stanley Biotech index consists of dozens of American firm within the biotechnology industry.

Some indexes actually have multiple versions.  The S&P 500, for example, has three versions: (1) price return, which considers components’ price, (2) total return, which accounts for dividend reinvestment, and (3) net total return, which accounts for dividend reinvestment after the withholding tax is deducted.

Stock Prices: Income vs. Growth
An income stock tends to have a flat price.  In other words, every year the price of the stock stays stagnant unless the company records large profits.  People receive money each year from dividends, yet the business may not be growing.  However, if the company decides to expand, then this is behavior of a growth company.  In this situation, the value of the stock will rise because there will now be twice as much equipment and profit earning by the company.  Shareholders do not receive a yearly dividend in growth stocks, but they do own a company with increasing value; thus, the shareholders will obtain more money when they sell their shares.  Ideally, someone would research the company and learn about its increasing value, which stems from the value of the buildings and equipment, and with that the increasing profit of the company.  This party would then pay a higher price for the stock, and the original shareholder will earn a profit from the sales.

Stock Market Options and Effects

The price of a stock in the stock market changes based on supply and demand. If more people wish to sell it than buy, then there is greater supply than demand, resulting in the price falling. A potential shareholder, if not relying on a broker to handle the accounts, should research the positive and negative news of a company. The investor should not equate the value of the company with its stock price. A company’s value is its market capitalization, which is defined as the sum of the total amount of various stocks issued by a corporation multiplied by the stocks’ price. The investor should always be aware that the price of stock reflects the anticipated growth of the company, not its current value.

Earnings reports are perhaps the most important factor that affects a company’s value. Every company must have positive earnings, or profit, reports to survive. During earning sessions, investors look at quarterly earnings reports to see if the results are better or worse than expected. If the company’s results are good, then the price jumps, and vice versa.

Market capitalization is not the only indication of a company’s success. During the late 1990s, many internet companies had market capitalizations in the billions of dollars, yet many of them made very little profit. The valuations were unstable and most saw their earnings dwindle during the dotcom bust. This proves that there are other variables i.e. price/earnings ratio, indicators, and moving average convergence divergences, that influence the price of stocks. In fact, no one truly can predict when and why stock prices change. Everyone agrees they are volatile and price is inconsistent and that perhaps looking at past price movements can best indicate when to sell; however, there is no one theory that can explain everything. While investors’ attitudes and expectations ultimately affect stock prices to some degree, it is still extremely difficult to come to a unified theory.

Stocks- Brokerage Firms
Most investors purchase stocks using a brokerage firm. While discount brokerages are inexpensive, full service brokerages offer advice, manage the investors’ accounts, send in statements, research various companies, and usually charge more. Since the buyer and seller are employing the brokerage to complete a deal, the brokerage may collect a percentage of the transaction, money from both parties, or only a commission from the seller. Some brokerage firms have recently begun trading stock in the Internet, which allows their clients more access to research information. Here, the shareholder is extensively involved with the brokerage and research in order to make the best deals. The benefit of brokerage firms is that they save their clients considerable time by facilitating the transactions, which some people are not comfortable doing on their own.

DRIPs & DIPs
Dividend reinvestment plans and direct investment plans allow shareholders to directly purchase stocks directly from the company. These plans are an efficient means of investing small amounts of money at regular intervals, as anyone can construct a portfolio of common stocks with few fees, and they are a popular alternative to using brokers.

Money Management

Wealth Management
Financial services that focus on wealth management provide numerous financial services – asset management, private banking, estate planning, stock market management – to their clients.  In an optimal situation, a client will take advantage of these services that range from balancing the checkbook to long range estate planning.  Managing personal investment and tax planning are also popular aspects of wealth management, as they can generate or save considerable sums, thus adding to the client’s wealth.  Such services are helpful to those who have just begun acquiring numerous assets and either don’t have the knowledge or time to manage their personal finances.

Those who wish to begin wealth management must have a certain level of educational background connected to finances.  Attorneys, brokers, and certified public accounts can be involved in providing wealth management.  Attorneys can structure estates and trusts to complete estate planning.  CPAs can advise a client on tax matters so that he can be exempt from certain dues and then reinvest the savings so that it can grow.  There are also seminars and courses on wealth management that help educate other parties on the topic.

Stock Market Investing Strategies
Many people gain considerable wealth in the stock market; however, some do not and can even take a loss.  The trick is devising a smart strategy. One such strategy is as follows: first, it is wise to spread one’s risk.  One should never have all of his eggs on one basket; rather, he should put away his assets in multiple financial vehicles so that should one do poorly, the others can still balance those losses.  Second, an investor should somewhat limit his investment in the stock market.  The stock market is inherently a gamble and someone can always lose money on the investment; as such, it is wise not to put everything away into this venue.  There are many other kinds of investment opportunities that are less risky than the stock market, and a person should spread out these investments to other markets.

Third, a person should always take an interest in current events and market trends.  An investor should not put his money away into a portfolio and then ignore it; rather, he should stay focused on the market, his own assets, any wealth accumulation or losses, and make decisions if need be.  Should he hear of a potentially hot commodity, then the investor might consider liquidating some of his assets and investing in the item.

Get Rich Quick Schemes
A person can increase his wealth in a relatively short period of time but with considerable financial risk.  Some people utilize “get rich quick” schemes, which is where they acquire instant wealth at the expense of others.  These schemes tend to involve high investments with artificially high returns; for example, a broker may call investors, convince them to buy options, and then sell them at a lower price.  Get rich schemes usually involve a fast return on investment and they are generally unethical, as companies can take advantage of people who think they can earn money through minimal effort.  Because the idea of accumulating instant wealth through minimal effort is so appealing, many people do fall for such schemes.

Types of Stock Markets

Stocks are traded on exchanges, places where sellers and buyers negotiate a price. Exchanges can be physical locations where transactions occur on the famous trading floors. Exchanges can also be located virtually and conducted electronically with computers. These exchanges are the lifeblood of the stock market, which is where securities are bought and sold. Stock markets facilitate this transaction in order to reduce the risk of investing.

Securities are created on the primary market. Here, public sector institutions, companies, and governments obtain funding after selling a stock or bond through a syndicate of securities dealers. The sale is called an initial public offering and the process is called underwriting.

The secondary market is where investors trade securities without the involvement of the issuing companies. When people refer to the stock market, they are in fact referring to the secondary market where these previously issued securities are sold and transferred from one investor to another. The secondary market is far more liquid than the primary one, as well.

New York Stock Exchange
Founded in 1792, the New York Stock Exchange is the market of choice for most of America’s largest corporations including Wal-mart, McDonald’s and General Electric. Most of the trading occurs in person on the trading floor. Prices are determined with an auction method – the highest amount a purchaser will spend and the lowest amount a party will sell – and once the trade is made, the details are sent to the brokerage firm who contacts the investor about the order. An individual known as the specialist is responsible for matching the buyers and sellers. Presently, virtually all but the highest priced stocks can be traded electronically. Customers can send route orders to the floor for trade or directly send in orders for immediate execution.

Nasdaq
Nasdaq is a mostly virtual market that has no central location or floor brokers. Instead, trading is conducted electronically. 5,000 of the more actively traded over-the-counter stocks are traded on Nasdaq. After the tech boom of the 1990s, Nasdaq became home to numerous large technology firms i.e. Oracle, Dell, and Microsoft. Market makers act as specialists, as they match up buyers and sellers directly; in addition, market makers preserve an inventory of snares to meet investor demands.

Firms that wish to qualify for listing on the exchange must be registered with the SEC, have at least three financial firms to act as brokers for special securities, and meet minimum requirements for public shares, capital, and shareholders.

Other Exchanges
Other exchanges include the American Stock Exchange, which generally deals with derivatives, where the price depends upon one or more underlying assets, and small cap stocks, which includes stocks with a relatively small market capitalization.

There are other global stock exchanges that represent much of the total global investment. The London Stock Exchange, Frankfurt Stock Exchange, and Hong Kong Stock Exchange are, in particular, powerful exchanges where billions in stocks are transacted every day.