Difference Between Stock Options & Restricted Stock

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    • Stock options and restricted stock are both part of some employment benefits.construction worker image by MAXFX from Fotolia.com

      Stock options and restricted stock both grant their bearers privileged buying options for stocks and other financial products. Stock options, which are also called derivatives, are, in essence, a contract that allows the bearer to buy or sell a stock at a predetermined price. Stock options also have an expiration date. Restricted stock, according to the Securities and Exchange Commission (SEC), is a special sort of stock given to company executives and other officials. These stocks come with a proviso against selling the stock if the trade might adversely affect the company. Restricted stock cannot be sold without SEC approval.

    About Stock Options

    • Whether from a company as part of a benefits package or purchased as part of a personal investment plan, stock options give their bearer the right to buy or sell a stock at a price that is more favorable than market value; however, stock options are time sensitive. There are two types of American stock options: calls and puts. The Chicago Board of Options Exchange (CBOE) defines call options as a contract that gives the holder the right to buy a certain stock at a certain price for a fixed period if time. Put options, according to the CBOE, allow the bearer to sell an option at a specific price. Neither of these types of options obligate the bearer to take any action.

    About Restricted Stock

    • As an alternative to stock options, companies often offer restricted stock to service providers. According to the SEC, a company usually issues restricted stock in exchange for professional services, as part of an employee stock benefit plan, as compensation for professional services or in exchange for providing "seed money" to the company. According to the law firm Morse Barnes-Brown Pendleton, restricted stock is often given instead of real cash as compensation. For tax purposes, the recipient has two options. First, you can claim as earned income the difference between the stock's market value and the price at which you were given it; your other option is to not file taxes on the restricted stock until the market price and the price at which you attained the stock are equal. There are time limits concerning how long you can hold a restricted stock; all activity regarding restricted stock must be approved by the SEC.

    Functional Differences

    • As a means of investment, stock options are much more flexible than restricted stock. You can buy, sell or do nothing at all with stock options, whereas you outright own restricted stock and must clear all activity regarding the stock with the SEC. Restricted stock is not without its advantages, though. You do actually own restricted stock and do have a vested interest in the company and are predisposed to making a profit from any action you take regarding the stock. With options, your commitment to the stock are on your own terms, as are your profits and losses. The tax structure is also more varied for earned income stemming from options-related investments, whereas there are only two options for restricted stock.

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