When Should You Exercise Your Stock Options?
As mentioned in previous articles, financial wellness is something that is in reach for all of us, if we take the time and effort to plan for it under the appropriate circumstances. There are a lot of resources that fall under the umbrella of financial planning or as we like to call it “financial therapy”. Stocks, being one of those resources that can help you in gaining much capital for your portfolio and the well-being of your assets as a whole. In more recent times, equity valuations have begun to steadily increase, which has prompted many to ask the question: “When is a good time to exercise my stock options?”
It’s not exactly something that is straight forward which is why it’s important to gauge the noise in the market while simultaneously working alongside a certified financial planner in Fairfield, to better understand the nuances of your personal stocks. Let’s deep dive into the factors that should be considered when exercising stock options and why having a financial planner in your corner will help in streamlining the process.
What Are Stock Options And Why Are They Important?
When exploring topics on this blog series, we always strive to educate our audience on the importance of viewing your personal finances from a more holistic lens. In doing so, it takes the guesswork out of financial planning and makes for an easier time in structuring your portfolios/assets in ways that is suitable for you, and your loved ones-who will presumably benefit from the fortune of your wealth too!
Before we deep dive into the steps of exercising stock options, it’s important to understand the basics of how stocks function and how they serve their users. Typically speaking, there are two main types of stock options, those being exchange-traded options and employee stock options. Employee stock options are a type of equity compensation that gives you permission to purchase a certain amount of company shares at a designated price, upon vesting.
Vesting is the point at which you will receive ownership of your options and how you can exercise them. Stock options are an extension of the organization and will closely align your interests with those of your employer. The higher the shares, the more that your personal options will be worth, which motivates employees to work even harder to augment the success of the company.
In terms of their function, employee stock options start on the grant date, which is the day you receive a stock option contract from your employer. The contract will explain how many company shares you’re able to purchase. The expiration date will also be set, so you’ll be fully aware of the time frame to exercise your options. It’s important to note that you’re not obligated to exercise your stocks. You have the right to hold or offload your shares at your convenience/
The two primary employee stock options are as follows:
ISOs (Incentive Stock Options): Also referred to as statutory or qualified stock options, ISOs will receive preferential tax treatment. When exercised shares are kept for a certain period of time, they check off the “qualifying disposition” box and will be taxed when a company sells their shares, with the shares being sold at capital gain rates. You can read more about the capital gains tax from this list of findings.
Nonstatutory Options (NSOs): NSOs or nonqualified stock options are taxed when exercised at income tax rates, and once more when the shares are sold. Any gains made will be taxed at capital gain tax rates. Outside providers, advisors, and consultants, are all eligible to receive NSOs.
Being aware of your options and the tax implications that accompany them is significant. Every piece of information that pertains to your stocks is vital in helping you to make an informed decision for the sake of your financial health and wellness. Any additional questions or feedback should be brought to the awareness of your financial advisor who has a full understanding of these elements.
When Should I Exercise My Stock Options?
Now that we’ve taken the time to grasp the fundamentals of stock options, it will be much more feasible to exercise them with the knowledge you’ve acquired. Simply put, if you stay employed at the company that provided you with stock options, you are capable of exercising your stocks at any point upon vesting until the expiration date (which is upwards of 10 years). In the event that you leave your employer, thoroughly comb through the fine print in your contract to see the allotted time given to exercise your options.
The following factors should be considered when exercising your stock options:
Do Your Options Have Value? You should only exercise your options if they have significant value. When they do have value, this is known as “in-the-money”, which is when the strike prices of your stocks are lower than the market price of your company shares that are traded on the exchange. In this situation, you could choose to exercise your options and purchase company shares at the lower strike price. There is room to be flexible, especially if your timeline to make decisions is stretched out.
Is your Company Publicly Or Privately Traded? This makes a huge difference. Shares of private companies are not usually traded on the stock exchange, so you will need to pay out of pocket to fund these purchases. Should a company file for an IPO, this could be a good indicator of exercising your incentive stock options, as they are subject to holding periods where if consumers wait at least two years post-grant, they can qualify for favorable tax treatment.
How It Fits Into Your Financial Situation: When making sound financial decisions, it all comes down to timing and how it fits into your long-term goals. Your financial planner will help you to evaluate your assets and the proper ways to manage them.
Working With A Certified Financial Planner in Fairfield
The decision to exercise your stock options is a personal one, meaning it will vary from person to person. Once you feel ready to make a decision, do so with diligence and patience. Our team at Armah Financial Services will serve as your financial anchor, acting as a reinforcement for your overall financial bandwidth. Contact us today to learn more about our process!