Stock options are an investment tool that corporations and security traders use as a way to reward executives. There are two types of stock options; qualified stock options and non-qualified stock options. Qualified stock options are regarded as incentive stock options. With this option, no taxes are charged during the exercise or grant period. Taxes are put off until the stock is sold. However, if the stock is sold before the required period, the sale will be referred to as a disqualifying disposition and taxes will be imposed at the higher individual tax rate.
In contrast, non-qualified stock options are ways a company compensates employees or service providers without paying cash. Instead of paying cash, a company grants an employee or other an option to purchase shares of stock at a fixed price. With a non-qualified stock option, there is an incentive to an employee to engage in a potential increase in the value of stock without having to risk any kind of investment. The company benefits from this kind of stock option because they receive a tax deduction.
To conclude, stock options are efficient investment tools. In addition, there are several benefits of stock options such as: being cost efficient, less risky, having a potential for higher returns and offering more strategic alternatives. Talk with an experienced investor today!