Stock options - A beginners guide.

[theboyfold]

I've just been offered some stock options with work, and due to a mix up I need to give my answer today (received my offer letter yesterday!).

As I'm not at home I don't have the letter to refer to at the moment, I had the wife read it to me over the phone last night! What are the implications of such offers? I'm sure they will vary from company to company, but I'm assuming that there are rules around them with regards to tax etc?

Essentially what I understand them to be is an option to by a predefined number of shares at a fixed price within a set period. Normally if I take up the option, do I have to buy them now or can I make my mind up during the window outlined in the letter?

I'm hoping to speak to our HR department about it later today, but they won't be able to tell me how it works with UK tax laws etc as they are based abroad.

[trickywoo]

theboyfold said:

1)Essentially what I understand them to be is an option to by a predefined number of shares at a fixed price within a set period.

2)Normally if I take up the option, do I have to buy them now or can I make my mind up during the window outlined in the letter?

1) That is correct

2) I'd imagine if the letter defines a window to buy them then thats acceptable. You will obviously buy them at what you expect to be the greatest difference between the market price and the price you need to pay within that window.

You can then choose to sell them straight away to make a profit or keep them in the expectation that they will go up some more. Or sell a few etc.

The difference between what you pay for them and what you sell them for will be subject to capital gains tax. A UK tax payer has an allownace (on the profit) of £10,100 before any tax needs to be paid. Above that it is either 18% or 28% IIRC depending on your total income.

Agian IIRC it will mean you have to fill in a self assessment form if you don't already.

[theboyfold]

Thanks for that, it makes sense so far. I have the rare treat of being able to speak to somebody in HR this afternoon now, so I'll hopefully get all my answers.

When it comes to selling stock, is this normally done outside of the company through a broker? If this is the case is there a fee etc? I'm trying to work out what the costs for me doing this are and what effect they have on the potential loss or reward of such a scheme. I've never dabbled with shares at all before as I'm not normally one for any form of risk in investments.

[trickywoo]

theboyfold said:

Thanks for that, it makes sense so far. I have the rare treat of being able to speak to somebody in HR this afternoon now, so I'll hopefully get all my answers.

When it comes to selling stock, is this normally done outside of the company through a broker? If this is the case is there a fee etc? I'm trying to work out what the costs for me doing this are and what effect they have on the potential loss or reward of such a scheme. I've never dabbled with shares at all before as I'm not normally one for any form of risk in investments.

If you hold the share certificate you can trade them via an online account (you can also do it by phone). Loads of companies offer a dealing service. Around £10 a trade and possibly a small percentage are quite common. If you are trading a few pounds the fees can eat into profit but for big trades (£1,000 plus) they aren't at all bad.

Its possible your company may offer an inhouse service so well worht asking.

[theboyfold]

trickywoo said:

If you hold the share certificate you can trade them via an online account (you can also do it by phone). Loads of companies offer a dealing service. Around £10 a trade and possibly a small percentage are quite common. If you are trading a few pounds the fees can eat into profit but for big trades (£1,000 plus) they aren't at all bad.

Its possible your company may offer an inhouse service so well worht asking.

Great, thanks for that.

I'm never normally one to do this, and I have to make my mind up by the end of the week so just have to make sure I've got all my questions answered!

[theboyfold]

Thanks for the replies on this. Just signed up to the scheme, my offer price is 25% below the current price which is in itself low already. Also should I decide to buy them the window in which I'm allowed to buy should be on an upturn for us (I know this due to the way our business works).

So fingers crossed, it should be quite a nice result