With stock options, you have the opportunity—but not the obligation—to buy company stock at a fixed price (known as the "award price"). Stock options are subject to a vesting schedule. The vesting schedule establishes the length of time you will need to be employed at your company before the ownership of the stock options shifts to you. Once vested, stock options will have value only if the current stock price is higher than the award price.
Video: Stock Options: What Are They? Video Transcript: Transcript: Stock Options: What Are They?Upbeat music plays throughout.
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Stock options: What are they?
An animated scene inside an airport terminal. Outside, visible through a window, an airplane taxies in from the right while a woman walks into the scene from the left, rolling her suitcase.
Female narrator: Investing is a journey. And stock options can be an important part of that journey that can help you get where you want to be.
The woman continues walking through the airport terminal, passing other travelers who are looking out a window at the plane rolling by.
Narrator: They're a way to share in your company's success. Because when the company does well, so do your stock options.
The woman steps onto an escalator going up, passing posters on the wall along the way.
Narrator: It's important to know that stock options aren't actually stock.
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WHAT ARE STOCK OPTIONS?
The option to buy shares of your company's stock at a specified price—called the award price
Narrator: They're the option to buy shares of your company's stock at a specified price—called the award price.
The woman studies the next poster and rests her chin in her hand, considering what she has just read.
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AWARD PRICE
The fixed price you'll pay for your shares
Narrator: No matter how much the stock price in the market might increase, you can still buy shares at your award price.
You earn your stock options over time, through a process called vesting.
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VESTING
This means earning your stock options over time.
Narrator: Once your options are vested, you have choices to make about when and how to exercise them.
As the woman passes the VESTING poster, she nods as if in agreement.
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EXERCISING OPTIONS
Purchasing your options of company stock—before they expire
The woman studies this final poster. She arrives at the top of the escalator and continues walking through the terminal.
Narrator: Exercising options means purchasing shares of your company stock. And you'll really want a plan for what you'll do with them before you exercise.
The woman passes others in the terminal. Then she pauses and moves her hand to her chin as if in thought. Three circles representing thought bubbles pop up above her head. The one on the left is navy with a bar graph; the one in the center is light blue with a calendar icon; and the one on the right is red with three dollar bills. The three circles then animate and merge together under the red circle featuring the money. The word "HOLD" appears on a monitor mounted near the windows.
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HOLD
Narrator: When making that decision, it's important to consider the value of the stock price, when your options expire, and your personal or financial tax situation.
The red circle animates to show an icon of a certificate, and the woman starts walking again.
Narrator: It also helps to think about what you want out of your exercise after it settles. Do you want cash to spend? Or would you rather have company stock?
There are three common ways to exercise: hold, sell, and sell-to-cover.
The woman resumes walking, and next to the monitor saying "HOLD," two other monitors come into view. The two new monitors say "SELL" and "SELL-TO-COVER," respectively. The woman stops and looks up at the monitors.
The frame zooms in on the monitor that says "HOLD."
Narrator: "Hold" means buying your shares and keeping all of them.
The word "HOLD" fades away and is replaced by a blue screen that has an icon of a stock certificated on the left.
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EXERCISE AND HOLD
If the market price dips below your award price, your shares will lose value.
Narrator: This gives your shares time to potentially gain value. But it can also be risky because there's no guarantee you'll make a profit. If, for example, the market price of the stock dips below your award price, your shares will lose value.
A dollar bill icon in a circle emerges from the stock certificate icon and moves up and down across the screen, mimicking the rise and fall of stock values.
The frame moves to the monitor containing the word "SELL" and zooms in.
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EXERCISE AND SELL
Money from sale of stock – Taxes = Your profit
A circle appears on the screen and a total of five dollar bills appear in it, one at a time.
Narrator: "Sell" means you exercise your options and immediately sell the purchased shares for cash. The money from the sale is yours after taxes, and you could use it to pay for a short-term financial goal or reinvest it, amongst other things.
The frame moves to the sign that says "Sell-to-cover" and zooms in. A circle appears that fills with three stock certificate icons.
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SELL-TO-COVER (Partial Sell)
Exercise stop options [then] Sell just enough shares to cover price and taxes [then] Own shares without spending cash
Narrator: "Sell-to-cover" means you exercise your stock options, then immediately sell just enough of the shares you just bought to cover the price and taxes. In the end, you're left with shares you own that you didn't have to dip into your savings to buy.
Zooms out to show the woman looking up at all three monitors. In the background, an airplane takes off from the left [Rumble of the jet engines] and ascends to the right.
Narrator: And before you make any exercise decisions, think about your financial goals and how your stock options can help you reach them.
The screen split into two frames. On the left, the woman resumes walking through the terminal. On the right, a beach scene appears, featuring a white Adirondack chair and a tropical drink under a sunny sky.
Narrator: Do you need to build up a retirement savings fund?
The woman continues walking in the left screen, while the right screen transitions to a laptop computer surrounded by a lamp, coffee mug, pencil holder and eyeglasses. On the computer screen is a circle graph divided into sections of various colors and with a dollar sign in the center.
Narrator: Diversify your investments to potentially grow wealth?
The right side of the screen then transitions to a young girl and a dog standing in front a house with a "For Sale" sign in the yard. The woman walks from the airport terminal in the left screen into the yard and joins the girl and the dog. The left screen disappears as a "Sold" sign covers the "For Sale" sign and the woman puts her arm around the girl. The dog wags its tail and barks.
Narrator: Or save for a home?
When you're ready to make your move, log in to the Equity Award Center to exercise your options.
A white screen fills and gray text appears.
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Still have questions?
Call a Schwab Stock Plan Specialist at 800-654-2593.
International Participants, call +1-602-355-3408.
Narrator: Still have questions? Give us a call.
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Schwab logo and "Own your tomorrow®" tagline animate in, and a disclosure appears.
Brand music plays.
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INVESTING INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL.
Schwab Stock Plan Services provides equity plan services and other financial services to corporations and employees through Charles Schwab & Co., Inc. ("Schwab"). Schwab, a registered broker-dealer, offers brokerage and custody services to its customers.
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