If you are a stock market investor or trader then you must’ve noticed that some executives buy a lot of stock in bulk and sell it for big profits. If it is true, then you must’ve thought how is it possible? How can someone buy the shares so cheap and sell them at market value making a large profit?
We understand it is one of the most difficult conundrums for the investors, who aren’t aware of this. But, don’t worry! We will reveal this secret of buying in cheap and selling in high. In fact, that’s why we’re here today.
Before we go any further let’s take a live example of a Google executive who purchased 2,541 shares of Google at $9 per share on October 30, 2006, and sells the same shares at the same day at $475 per share. During this, the executive made a profit of about $1.18 million.
You must be wondering, how?
Well, the method behind this is employee stock options (ESO). It is a method which is very popular among startups to attract top talent without paying high salaries up front.
Employee Stock Options (ESO)
It is a stock option granted to specified employees of a company. However, it is slightly different from the exchange-trading option, because it is not traded between investors on an exchange. Instead, it offers the options’ holder the right to purchase a part of the company’s shares at a predetermined price for a certain period of time.
The popularity of employee stock options is due to multiple benefits. Most important one is, it is a potentially huge tax saver. When in awarding employees option that allows them to buy a certain amount of shares for a fixed price at a specific period of time then the employees do have the rights to keep the shares as the investment of sell immediately, for profit reasons.
Most Incentive Stock Options (ISOs) are tax-advantaged.
“Stock Options” is a motivational method which also motivates managers by linking compensation with company performance, which is gauged by the share price. Plus, unlike market-traded stock options, ESOs are provided as a bonus or portion of salary.
Final Thoughts: –
Overall, we can say that “stock options” is a very good method for buying stock in cheap and sell it at market value for gaining but as the exercise price it is often very low. In fact, it has a disadvantage for companies that use them; most important among them is the possibility of diluting shareholder equity when an employee exercises them. The liquidity is the main concern for employees who are in employee stock options especially through a private company. But, if the company is performing well such as the Google then the employees can exercise their options for the large gains.
If you have any query or would like to add something then doesn’t forget to mention in the comment section below.
For more stock market tips or stock related queries, visit our homepage of Advisorymandi.com.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.