The concept of rewarding employees of a company is a very important one. Companies have to devise different ways for them to reward their various employees for a work well done. If employees don’t get extra incentive for their labor, they would lack motivation to work better and produce better results. This would in turn spell doom for the company.
One of the popular ways of rewarding employees has been the advent of stock options. This article would go on to subsequently discuss what you need to know about stock options. This would be done under the following outline:
- What is a stock option?
- What are the benefits of stock options?
- What are the drawbacks of stock options?
What Is A Stock Option
A stock option is a means of compensation in which a company grants a right to an employee to purchase its stock at a discounted price from the market value. An option can also be the right to sell a stock at a given price. The right to exercise stock options is usually within a given period of time.
The price that is set for the purchase of an option is called the strike price or the grant price. The period during which an employee has the right to exercise the option is known as the vesting period.
Options can either be constructed in European or American style. A stock option is constructed in American style when the employee can exercise the right to the option before the expiration of the vesting period. A European style option is the one in which the only time the right can be exercised is on the day that the vesting period expires. Most options are constructed in American style.
There are two types of options: put options and call options. Put options are the ones that grant to the employee the right to sell them at a determined price. Call options are those that grant the employee or beneficiary the right to buy a share at a particular price. Call options are relatively more popular than put options.
It should be noted that options are usually sold in units of 100 shares. This unit is technically known as the contract multiplier.
People trade options in the options market. The participants in an options market are called holders and writers. Holders are those people that buy options. Option writers are those that sell options.
What Are the Benefits of Stock Options?
The concept of options confers a lot of benefits on both the employer and the employee. These benefits shall be subsequently highlighted below.
- Options Help Attract and Keep Good Employees: The use of options as stated helps a company to attract employees that are very skilled. Also, the employees that are with the company that also have the talent are also encouraged to stay due to the options. Stock options are a very important and effective compensation scheme.
- It Help Motivate Employees: Stock options give the employee a right to buy shares at a discounted price which can be sold later in the market. An employee knows that if the company performs well, the price of the stock would increase and he has a lot to gain. This motivates him to do his possible best to put his company in a better position. If the company performs well, the stock price increases and the employee gains a lot from it.
- It Is A Cost Effective Way Of Rewarding Employees: Stock options are very cost effective and they also help to reward the employees at the same time. Instead of paying cash to reward employees, options can be used. The costs associated with options are just the costs of not being able to sell additional shares to the public and the cost of carrying out the operation. In all it doesn’t take much cash from the company.
The Drawbacks of Using Stock Options
- It Encourages Risky Actions: The use of stock options as reward encourages company executives to take risky actions. Employees gain from stock options when the price of the stock rises. Thus, executives could take unsound risks for the company in a bid to just help make the stock price increase and they gain from their options.
- Reduces Company Earnings: The use of options reduce a company’s earning. When a company issues options and they are exercised, it increases the outstanding shares of the company. This in turn reduces the earnings of the company as the profits have to be divided amongst more shares. This is a process called dilution.
Alternative to trading Stock Options is trading with binary options. It’s a lot simpler and risk free. You can read more about it here:
For example is a company has an initial 200 outstanding shares and it grants an option of 50 shares to employees. If the profit of the company is $2000, the earnings of the company would have to be split by 250 shares which would make it lesser than if it were split amongst 200 shares.
Binary options are not only safe and popular but also legal methods of online trading. Today, binary options stock trading is a rewarding concept that gives a good return per investment made. Binary options stock trading requires no experience since the only requirement is the speculation of assets’ movement, placing a “put” or “call” option in accordance to the trend of the asset.
In order to perfectly understand binary options, you need to assess how other investment forms operate. Most investment cultures stipulate that an investor should buy a specific product or an asset and determine the loss or profitability of the product in accordance to the selling value of the asset.
Whenever an investor sells an asset at a higher price compared to the actual value of the asset, then that is termed as a profit. If the value of the asset has decreased on selling, that is a loss. Such an investment makes the investor to constantly wallow in thoughts worrying about the right time to sell the stock.
Conversely, stock trading via binary options is much easier. That is because binary option entails the prediction of the movement of assets for a given time period. Therefore, there is no psychological stress that accrues to an investor. In Binary Options, there are two investment possibilities; “call” option and “put” option.
“Call” option is normally expressed when there is a prediction of the increase in assets’ prices. On the other hand, “put” option is represented when the asset’s price is predicted to fall. An investor stands a better chance of predicting price fluctuation if the investor is familiar with the market of the asset.
Difference between day trading and binary options
Day trading and binary options are both money making ways, but they have some differences. In Binary options, a trader’s profit or loss margin depends wholly on the market proposition result. Such a trader will either have an outcome of fixed losses or fixed profits. On the other hand, day trading entails closed or open positions in the same session of trade. The number of bought lots, shares, contracts, exit price and entry price are some of the factors that the loss or profit of a day trader depends on.
An option can be defined as a financial derivative whose primary function is to give buying and selling rights to the holder in order to trade at the financial asset’s or security’s fixed price at a strike or agreed-upon price in a given time. However, a trader operating under a binary option doesn’t necessarily have to deal in the underlying asset.
Some of the underlying assets in which binary options are available include events, indices, currencies, stocks and commodities. Some of the events may include an upcoming announcement of Nonfarm Payroll, Jobless Claims or Fed Funds Rate. In most cases, binary options provide straight answers such as yes or no to questions. For example, will diamond’s price be above $1,000 at 5:00 p.m.? Like in this case, if the answer is yes, consider purchasing the binary option.
However, if the answer is No, the best option is to sell. In this example, the binary option buying or selling price will not equate the diamond’s actual price but will rather range from zero to 100. Although the price fluctuates during the day, in case the answer was positive, the trading range will settle at 100. But for a negative answer, the range settles at zero. The difference between the opening price (the selling or buying price) and the settlement price is what gives the profit or loss incurred by a trader. There are services that predicts the prize movement. InvestoCopy for example is one of the first Social Network for binary options.
Binary option stock trading is like a “gamble” since the traders are not sure whether the asset’s price has increased or fallen below a specific amount during a specified time period. Although day trading also includes predictions of the price direction, the profits or losses largely depends on the trade size, entry price, techniques of money management and the exit price.
However, day traders may also use stop losses and profit targets to determine the maximum loss or gain. For example, an investor might enter into business and incorporate a $70 stop loss and a $ 300 profit target. However, profits can be “left to run” at times so as to reap the advantages of large moves in price. Stop loss helps to control the loss margins.
Binary options derive its name ‘binary’ from the computing field which means an ON/OFF situation or Yes/ NO situations.
In business, binary options explained in layman’s language is an option in which some compensation is set aside for an investor to gain or lose for predicting the outcome of something within a stipulated amount of time. If you predict that the value of an asset will rise, it is called (call option). If you predict that the value of an asset will drop, it is called (put option). If you guess right, you win; you guess wrongly, you lose. It is simply a gamble game.
For example will the share price of X company be above or below 7$ on 9th August 2015 at 10:00 am?
- What do you trade as binary options?
A number of assets can be traded as binary options, namely;
Currencies (forex) – world major currencies can be structured in different ways to form a binary option.
Stocks and shares- The stock exchange market has this kind of investment
Commodities such as Gold and Silver can also be traded.
World major indices- binary options can be traded on indices, some of the world’s major indices include All Ordinaries, Shanghai Composite and Hang Seng.
- How is the value of the binary option computed?
There are different ways binary option contracts are computed, others are pure prediction by the companies while others follow this rule that The value of a binary option payout is estimated to be same to the market’s notion of the possibility of the event occurring. Others employ mathematical formulas like Black–Scholes formula
- Things to do when participating in binary options contracts.
- Binary options deal with two possibilities and you should know them outright.
- Make a decision of the stand you want to take.
- Understand the terms and conditions.
- Make a bet and wait for the outcome
- How does one identify a binary options broker?
Ask yourself these questions when choosing a binary trade broker.
- Is working with the broker efficient? No one wants to lose precious time trying to do business with an inefficient customer.
- Does that broker have the kind of assets you are interested in?
- Profits- identify a broker with high rates of profit.
- Does the trader give back some money when you lose? Some traders give back some money and it’s prudent to take advantage of this.
- What are the advantages of binary options trading?
- All you need to do is predict, thus it makes it an easy way to trade. It doesn’t go deeper into giving the actual milestone a certain asset is going to lose or gain.
- Time- binary trades have all ranges, some even lasting short periods while others can take longer.
- Yes, it is a risk, but the turnover can be amazing.
- Everything is defined. You know in advance what to lose or gain.
- It is a quick way of making money without investing.
- What is the major crime associated with binary options?
Binary options have its major shortcomings and drawbacks hence it is advisable you do research on whom you are dealing with before engaging in such activities. In many countries binary option trading is not regulated by law, hence the participant is left in the sole discretion of the broker. This gives room to brokers to exploit the unsuspecting customers in several ways. Some of the common crimes associated with binary options are
Non reimbursement of bidders’ accounts- some unscrupulous brokers do not put money at customers’ accounts resulting in spamming situation.
Too much information other brokers require too much information from customers e.g. credit cards. That can be fatal.
Untrusted software that generates wrong results is very common.
You may be enthusiastic to get started so that you can make those tremendous returns you hear so much about. Now, slow down and take a moment to consider some simple questions. You should know that the time spent now to think about the following will save you money down the road.
First question you need to ask yourself is – what kind of person are you? Are you a risk taker? Are you willing to throw money at a chance to make lots of money or would you prefer a more sure thing? And what would be your possible response to a ten percent drop in a single stock in one day or a thirty five percent drop over the course of a few weeks? What would you do? Would you sell it all in a panic?
The thing is that the answers to these and some similar questions will show you the way to think about different types of equity investments, such as index or mutual funds versus individual stocks. The best bet for you might be index funds or mutual funds if you are naturally not the person who take risks, and if you feel uncomfortable doing so, but still want to invest in stocks. This is because they contain many different stocks and because they are well diversified. This reduces risk – and does not require individual stock research.
Should you invest in stocks, funds or both? And how much time you wish to devote to this endeavor – the answer depends on. Careful selection of index or mutual funds would let you invest your money, by leaving you the hard work of picking stocks to the fund manager. According to the type of industry, company or market they are designed to track index funds and they are even simpler in that they move down or up.
It requires you to make decisions about earnings, management and future prospects – individual stock investing is the most time consuming. And you are attempting to differentiate between a financial disaster and money-making stock as an investor. You need to know how they make their money, what they do, the future prospects, the risks and much more.
So, ask yourself how much time you have to dedicate to this enterprise. Also, ask yourself are you willing to spend a few of hours a week, or more in order to read about different companies? You should know that investing in individual stocks is a skill, which takes some time to develop.
The best thing is that you are not exposed to only one type of asset. For example, do not put all of your money in small biotech companies. The thing is that your whole portfolio will be negatively impacted.
Now, it is better to be diversified across a few different sectors such as consumer goods, real estate, insurance, commodities and so on, more willingly than focusing on 1 or 2 or 3, as above. Think about diversifying across advantage classes, in addition by keeping some money in cash and bonds, rather than being hundred percent invested in stocks. It is up to you how much to have in these dissimilar classes and sectors, but being invested more generally reduces the risk of losing it all at any one time.
Most stocks are exchanged on trades, which are spots where purchasers and venders meet and settle on a cost. A few trades are physical areas where exchanges are completed on an exchanging floor. You’ve likely seen pictures of an exchanging floor, in which brokers are fiercely tossing their arms up, waving, shouting, and motioning to one another. The other kind of trade is virtual, made out of a system of PCs where exchanges are made electronically. The reason for a stock exchange is to encourage the trading of securities in the middle of purchasers and venders, lessening the dangers of contributing. Simply envision how troublesome it would be to offer shares in the event that you needed to call around the area attempting to discover a purchaser. Truly, a stock exchange is simply a super-complex agriculturists’ business connecting purchasers and dealers. Before we go on, we ought to recognize the essential business sector and the auxiliary business. The essential business is the place securities are made (by method for an IPO) while, in the auxiliary business, speculators exchange beforehand issued securities without the inclusion of the issuing-organizations. The optional business sector is the thing that individuals are alluding to when they discuss stocks. It is imperative to comprehend that the exchanging of an organization’s stock does not specifically include that organization.
The exchanging floor of the NYSE
The NYSE is the first kind of trade (as we alluded to above), where a great part of the exchanging is carried out up close and personal on an exchanging floor. This is additionally alluded to as a recorded trade. Requests come in through financier firms that are individuals from the trade and stream down to floor agents who go to a particular spot on the floor where the stock exchanges. At this area, known as the exchanging post, there is a particular individual known as the authority whose occupation is to match purchasers and merchants. Costs are resolved utilizing a bartering system: the current cost is the most noteworthy sum any purchaser is willing to pay and the least cost at which somebody is willing to offer. When an exchange has been made, the subtle elements are sent back to the financier firm, who then informs the speculator who submitted the request. Albeit there is human contact in this methodology, don’t believe that the NYSE is still in the Stone Age: PCs assume a gigantic part simultaneously.
The second kind of trade is the virtual sort brought an over-the-counter (OTC) business, of which the Nasdaq is the most mainstream. These business sectors have no focal area or floor specialists at all. Exchanging is carried out through a PC and information transfers system of merchants. It used to be that the biggest organizations were recorded just on the NYSE while all other second level stocks exchanged on alternate trades. The tech blast of the late ’90s changed this; now the Nasdaq is home to a few major innovation organizations, for example, Microsoft, Intel, and Oracle. This has brought about the Nasdaq turning into a genuine contender to the NYSE.