Investing

Difference Between Stock Options and Equity

Over the weekend I was binge-watching the WeCrashed docu-series. In the docu-series, they were mentioning how everyone in the company was going to be millionaires because they were getting “stock options” in the company. I thought that was odd and maybe that was just a tv series mistake. But after a googling it I realized a lot of people truly misunderstood what stock options were. But I thought it can’t be that many people right? So, I went out and started to start a discussion with my colleagues and friends. They also had either confusion or no knowledge of the difference between stock options and equity.

This is why I wanted to write this article. To dispel rumors and misunderstandings between stock options and equity. That way you are not in the same boat as those poor WeWork employees whose lives were crushed when they realized that weren’t going to be millionaires overnight. So, let’s start by defining what Stock options are.

What are Stock Options?

So, what are stock options anyways? Stock Options are what a company provides an investor with the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. This is a favorite of most fast-rising start-ups. Start-ups use this in order to provide employees with the incentive to work hard and increase the values of those shares. The way stock options typically work, is by allowing employees to buy shares for the lowest amount in a 30-90 day cycle. Most companies typically go on a 90-day cycle. Meaning, that let’s say a current stock price is $80/share but in the previous 90 days the lowest stock price was $35/share. The employees of the company will have the ability to acquire those shares at $35/share.

Most companies don’t typically provide this to new employees. They usually have a time-in-service approach to providing this. You also are only able to buy stock options during certain periods of the year due to some SEC rules. Which I won’t get into in this article. If you are interested in learning more about stock options check out this book. Yes, it is a stock option for dummies book, but let me tell you these books are my best friends for learning finance. So, take advantage of that books.

What is Equity in a Company?

Now that we have defined stock options. Let’s define equity! This might be a little easier for most. Because this is the most basic way people think of when investing. Equity is literally the actual stock you own in a company. For instance, if I am provided 1000 shares in a company upon getting hired by the company. That would be considered equity. Because I was provided those shares and I didn’t have to buy them at a different time. Those shares are items I can utilize as collateral for the debt that I can pull. That in a nutshell is what equity is!

Difference Between Stock Options and Equity

Difference Between Stock Options and Equity?

I think by now you can start to put together the difference between stock options and equity. But it’s always good to do a quick review. So, to be clear stock options are provided to the investor with the right, but not obligation, to buy or sell a stock on an agreed-upon date and time. Equity is ownership of assets that may have debts or other liabilities attached to them. Such as actually receiving shares in a company.

Takeaway

Those are the differences between stock options and equity. Hopefully, after this article, you understand the difference a little bit better. The goal of this article was to make sure you understand what you are getting and not get duped by a snazzy billionaire giving your his magical pep talk. But remember to use these articles as starting points. There are a lot of resources out there, seek them out and keep learning!

If you enjoyed this article check out our other investing articles!

There are a few things to know about me. First thing is that I make my own rules 100% of the time. Second, Kobayashi Maru. Finally, I'm a storyteller and a Marine Corps Officer. I am also a Serial Entrepreneur looking to provide easy life hacks for all the up-and-coming Millennials and Gen Zers. These are my tricks of the trade and I'm here to pass them on to you! Kobayashi Maru Baby!

LEAVE A RESPONSE

Your email address will not be published.