How do stock options work?

Stock options allow employees to reap the benefits of their company's growth. See more investing pictures.
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Job ads in the classifieds mention stock options more and more frequently. Companies are offering this benefit not just to top-paid executives but also to rank-and-file employees. What are stock options? Why are companies offering them? Are employees guaranteed a profit just because they have stock options? The answers to these questions will give you a much better idea about this increasingly popular movement.

Let's start with a simple definition of stock options:

Stock options from your employer give you the right to buy a specific number of shares of your company's stock during a time and at a price that your employer specifies.

Both privately and publicly held companies make options available for several reasons:

  • They want to attract and keep good workers.
  • They want their employees to feel like owners or partners in the business.
  • They want to hire skilled workers by offering compensation that goes beyond a salary. This is especially true in start-up companies that want to hold on to as much cash as possible.

Go to the next page to learn why stock options are beneficial and how they are offered to employees.