Stock options glossary
Even if you don't have a complete command of financial jargon, a few
basic words and phrases will help you navigate your company's stock
Grant: This is an invitation from your company
to buy its stock at a certain price during a certain period of time.
Exercise: With a regular stock option plan, when you pay
for the stock, you have exercised your options.
With employee stock purchase plans, you make periodic payments
through payroll deductions. When the company buys the stock for
you, you have exercised your options.
Vested: When stocks vest, that means you can own it in your
own name. The typical stock option plan works in stages, almost
like a game of "Mother-May-I?" A company invites you to
buy its stock at a particular price. If you say yes, then you have
to wait a period of time before you are actually allowed to buy
the stock. Once the stock is vested, the power shifts to the employee.
You can buy it, not buy it or wait until the clock runs out.
In some plans, you're allowed to buy options before
they vest, says Kaye A. Thomas, author of "Consider Your Options."
"These plans are usually offered only by pre-IPO
companies," he says. And if you leave the company, it will
likely demand the right to buy back any unvested shares, he adds.
Spread: Also known as the "bargain element," this
is the difference between what a stock is worth on the date you
exercise it and the price you pay.
Under water: When the market value of a stock
sinks below the exercise price of an option, the option has no value
or is "under water."
Capital gains tax: You pay this tax on money
you make through investments. Usually, depending on your tax bracket
and a host of other factors, the rate for long-term capital gains
tax is less than for income tax.
Alternative minimum tax: The ATM involves a
different set of rules to calculate your annual tax return. If you
exercise incentive stock options, you'll have to calculate your
taxes both ways -- and pay based on the higher total.
Dana Dratch is a freelance writer based in Atlanta.
-- Posted: May 20, 2004