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stock option

A stock option is a contract that allows a person to buy a specific number of stock/shares of a company at a specific price (known as the exercise price or strike price) for a set time period in the future. The price is typically determined at the time the stock option is initially offered. Stock options are most commonly used as incentives or compensation for employees and are especially valuable for start-up companies that expect to experience growth in the future and must retain strong employee retention. 

An example of a stock option is when a startup company offers its employees the option to buy company stock at the current market value price and allows the employees to buy stock at this set price for the next 5 years, regardless of how much the stock value increases. 

The two types of stock options are non-qualified stock options and incentive stock options (ISOs). 

• Non-qualified stock options are more flexible and can be offered to a wider variety of individuals. 
• ISOs have stricter rules and are defined by the advantages they provide for employees of the company offering stocks.

 

[Last reviewed in June of 2024 by the Wex Definitions Team
]

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