Business & Finance

Restricted Stock vs Stock Options: What Are the Differences?

What do you know about restricted stock and stock options?

Sure, you know you get stuck when you start working at a company. But do you know the difference or how to send the best one? And how can you be sure you’re not losing important information about your stock?

Still, trying to figure out how to tackle it? Not a problem. That’s why we’re here.

In this article, we’ll give you a complete overview of restricted stock vs stock options, two forms of equity that companies may offer to their staff. Keep reading to learn more!

Benefits

Both are significant benefits for employees in most companies. What is Restricted stock? It is the stock given to company employees. This stock cannot be sold or bought without an agreement from the company.

The benefits of restricted stock are that the employee owns the store immediately and receives any dividends the company may pay. Stock options are a type of equity compensation given to an employee. The employee can buy a certain amount of company shares at a specified price.

The primary benefit of stock options is the potential upside. If the stock’s market price rises above the agreed-upon price, the options become more valuable—besides, Restricted benefits more from the company’s success. The better the company does financially, the more valuable the stock becomes and the more money the recipient earns.

The benefit of stock options is that the employee can buy the stock at a lower price than its current market price. Both offer employees great financial benefits that allow them to get company stock on better terms than the public.

Drawbacks

Stock options have a set end date that cannot extend or alter. It is only beneficial if the stock has enough value and makes revenue before the end date. Additionally, stock options are not as easy to cash out as restricted stock.

Restricted is not as liquid as stock options and is not transferable to another individual. Finally, stock options need careful financial planning to ensure they are not taxed too heavily. With restricted stock, the holder pays taxes when it is vested, meaning he owns it.

So, weighing the pros and cons of stock options and restricted stock and deciding which option is best is essential. Another drawback of stock is that an individual has to wait for the vesting period to complete before they can exercise their options and buy the shares.

It can lead to stock prices increasing beyond what the individual would want to pay, preventing them from exercising their options. Tock options may create negative incentives since employees may engage in behavior that focuses more on short-term gains than the company’s long-term health.

Costs

Stock options give you the right to buy shares at a set price later, while restricted stock is a gift of stock or claims that come with restrictions, such as a vesting period before you can sell the shares. Both options can be beneficial, but the cost of stock options and restricted stock are different.

The cost of stock options is low since you only have to pay for what you choose. There is usually only a small fee associated with purchasing stock options. Besides, the cost of restricted stock is usually much higher than stock options and typically rests around the total market value of the shares.

For startup founders, they may need to pay income tax on restricted stocks that they receive. As such, the cost of stock options is more affordable, while the price of a limited supply can be relatively high.

Return

Both types of stock can reward hardworking employees and increase the company’s return due to their investments. When stock options are exercised, the shareholder must buy shares of the company at a given price, meaning that the profit made from the stock depends on market conditions.

So, restricted stock is a reward from a company to an employee. The company pays for the stock upfront, and the employee does not pay anything.

It gives employees a greater return on their investment as long as the stock price hasn’t decreased as much as they paid for it. Yet, the employee’s return is less significant than it would be if the stock price had increased.

Profit 

Restricted stock is when a company gives the investor stock that is not tradable on the market. Investors must wait till a specific date to be able to sell their stock. Stock options are when a company allows an investor to buy or sell a certain amount of stock at a specific price.

The profit from either of these investments depends mainly on the investor’s ability to predict movement in the stock market. If an investor can accurately predict the highs and lows of the stock market, the potential for making a profit is high. Therefore, when deciding between these two types of investments, it is essential to understand the nuances of each and how it may impact the profit potential.

Choose Between Restricted Stock vs Stock Options 

Understanding the differences between Restricted Stock vs Stock Options is essential to make an informed investment decision. The restricted stock offers fewer risks but immediate compensation for labor, while stock options provide a more significant potential for future financial gain.

Make sure to weigh the pros and cons of each before making a decision. Consider talking to a financial professional if you need help deciding what type of equity will best serve your needs.

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