Today, many companies are offering stock options to help maintain a competitive edge when it comes to attracting and retaining talent. More employees are also opening up to the benefits of equity compensation and accepting it as part of their overall compensation package.
By doing so, they have a more significant stake in the business and increase their chances of growing phenomenal wealth if it becomes profitable.
A common question among employees is this: When is the right time to cash on my stock options? If you have been granted stock options, the right time to exercise or sell them must be identified strategically.
In this blog post, let’s understand the factors that should guide your decision.
4 Key rules to guide your decision
Any financial decision taken by you needs to be a well-informed and strategic one. Cashing in on your stock options is also a financial decision, and it needs to be treated with that lens.
Here are four rules that can help you navigate your journey with stock options:
1. Don’t let guilt get in the way
Owning stock options can be a matter of pride. One may also feel peer pressure to hold on to their options until exercised or until a company is publicly traded. However, it is important to remember that equity compensation is offered instead of cash compensation. It is an incentive that the company has offered to attract you to join the team and to retain you for a certain period of time.
Therefore, cashing in on stock options has nothing to do with your ability to stay with the company. You can decide to cash in on stock options and continue to stay with the company and keep performing in a way that benefits the company and enables you to rise up the corporate ladder.
2. Establish the value of the stock options
When a company issues stock options, you have a right to purchase them at a price lower than the fair market price. However, you are not obligated to exercise them. Some employees exercise their options way before the Initial Public Offering (IPO).
One approach is to wait to exercise the stock options until the stock is publicly traded. If you observe that the stock price rises, you can exercise the stock and turn a profit by selling it for a higher profit on the stock exchange. Make sure you have budgeted for this expenditure if you have already decided to exercise the stock options.
On the other hand, if your company has an upcoming IPO planned, you may consider timing the exercise of the options so that you have the potential to sell at a higher price once it goes public.
3. Gauge your own financial needs
Your financial needs must always guide your financial decisions. This rule also applies to the judgment in your stock options. Selling your stock may be triggered by a need to fulfill certain short-term financial needs. The key is determining if your needs merit letting go of this asset.
Let’s look at some financial situations and goals that outclass others:
- You do not have emergency funds and want to cash on your stock options towards building this safety net, which comprises three to six months of non-discretionary monthly expenses.
- If you are in debt, such as a credit card debt where the high-interest rate is high, the funds can be used to pay it off faster and accelerate your journey towards becoming debt-free.
- You can use the funds to contribute towards any government-backed pension fund, which also translates towards tax deductions.
- Use it to buy health insurance, which can protect you and your family in medical emergencies.
4. Don’t sell out of panic
Human psychology plays an important role in the decisions made by stock market investors. The stock market goes through several highs and lows. When the market dips, investors tend to panic and sell their stock at a much lower price. This action is driven by emotion rather than logic.
You may want to sell your stock options when the market value rises. You may also want to cash in when the company is going through a difficult phase in terms of the business. However, history indicates that many companies go through tough times, and those who are patient and hold on to their stocks for a more extended period benefit financially.
The decision to exercise stock options for sale on the stock market must depend on one’s long-term financial goals. A knee-jerk reaction to market trends must not precede it.
As an employee who is granted stock options, it is important to understand how to leverage them to meet your financial and life goals. Be sure to read the contract concerning your stock options carefully.
Additionally, start investing in building your financial knowledge. These steps can collectively help you make an informed decision when it comes to cashing in on your stock options so that it translates to a positive and profitable outcome in the long term.
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