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Basics: Benefits

Why do stock options offer greater financial benefits than simply buying shares of company stock in the open market?

Stock options give you the opportunity to buy shares of stock at a price that is fixed on the grant date, regardless of what the market price is when you exercise. When your company's stock price rises between grant and exercise, you stand to profit immediately upon exercise; meanwhile, you did not tie up your cash by purchasing the stock earlier. This fixed purchase price with stock options offers substantial upside leverage. Plus, the grant of a stock option is tax-free (though there are tax consequences at exercise and later sale, as discussed in other FAQs).

Example: You are granted options at $10 a share. You may fully exercise them after working four years, and they expire 10 years from the grant date. Even though the stock price is $40 when you exercise, your purchase price is still $10.
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