Whats the difference between stock and stock options?
In: Economics
When you own stock you own shares of the company that issued it.
An option is a contractual obligation that lets you purchase a certain number of share of stock of the company at a fixed price (the “strike price”) for a certain period of time. For instance, say the stock of your employer’s company is trading for $10 a share. They might grant you an option to buy 1,000 shares for $10 a share in the next two years. This gives you an incentive to drive the share price up during the option term. If the price goes to $20 a share you can buy 1,000 shares for $10,000 and receive stock of $20,000, thus locking-in a $10K pre-tax profit. This is a “compensatory” option because it was granted to an employee/service provider in return for services provided.
There are also market options called Calls which allow you to purchase shares on the market for a pre-negotiated price. With market options you pay cash for the right to purchase the stock, with the hope that the underlying stock price goes up.
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