What are Stock Dividends and Stock Options?

A type of financial security that signifies ownership in a corporation that represents a claim on part of the corporation’s assets and earnings. When a company pays a stock dividend, it’s a way for the company to share its financial success with its investors. When a company offers a stock option plan, it’s also a way for the company to share its financial success, but with its employees. Many companies pay stock dividends, but not many companies offer stock option plans.

Stock Basics

There are many different types of equity investments including common stock, preferred stock, convertible stock and restricted stock. These resources will help you learn the difference between each and help you understand derivatives such as stock options and warrants.Some of them are Preferred stocks typically pay regular dividends and are for investors who favor income. Common stocks represent ownership of a company and may offer more rights and privileges than preferred stock. Different variations exist of both types, but we’ll stick with the basics. Just by reading their names you can almost tell there is a difference between the two. Preferred stock typically gets reserved for company executives, although many companies offer preferred shares on the open market. Preferred stock has certain advantages over common stock. For example, preferred stockholders receive a guarantee dividend plus, in the event a company goes belly up, preferred shareholders have first rights to company assets over common stockholders. On the other hand, common stockholders may not receive a guaranteed dividend, but common stock typically appreciates faster than preferred stock. Also, preferred stockholders do not receive voting rights like common stockholders.

Stock Dividends

Most investors who have participated in the markets for even a short length of time have heard about dividends. What many may not know is that dividends are paid in multiple forms. This piece will focus on stock dividends and how they are different from other forms of shareholder payouts. Stock payouts can be just as rewarding as cash dividends, though sometimes they can be sign of a trouble for the issuing company.

A stock dividend is a payout to shareholders in the form of additional shares in the issuing company. For example, Joe Investor owns 100 shares of ABC Inc. and ABC declares a 10 percent stock dividend for the end of the third quarter. Joe will receive a 10 additional ABC shares as a dividend.
Why Companies Use Stock Dividends. Perhaps a company's float (the shares available to the public) is small and the company wants to increase it but doesn't want to do a secondary share offering. A stock dividend could also be a reward to shareholders simply because management wants to show shareholder appreciation. Another reason may be that the company wants to pay a dividend, but doesn't have the cash reserves to pay a cash dividend.

Stock Options

"Stock options are contracts; they don't represent ownership in anything. They are merely contracts that grant you certain rights".
Definition of Stock Options: If you buy or own a stock option contract it gives you the "right", but not the "obligation", to buy or sell shares of a stock at a "set price" on or before a given "date" (time period). After this date, your contract expires and your option ceases to exist.
For example, a contract at a country club may grant you the right to use the country club whenever you choose to, but you're not obligated to use it. It's not like they're going to send the country club police to your house and make you go there.

A stock option contract grants you the right to buy or sell a specific stock.

1 stock option contract = 100 shares of a company's stock. So when you buy 1 contract you are buying the right to buy or sell 100 shares of that stock.
I have a one year contract with a local gym here. It gives me the right, but not the obligation, to go to the gym whenever I want for a year. They don't make me go, but if I don't exercise my right to go then I lose the money I paid for this right. After a year my contract ends and I no longer have the right to workout at that gym.

Employee stock option plans offer company personnel a way to own the company’s stock at a price discounted from the current market price. When you participate in an employee stock option plan, you do not own the stock, but you have the right to purchase the stock at some point in the future. Some companies give each employee a set number of shares based on the employee’s hierarchy within the company. At some point when you decide to buy the stock, commonly known as exercising the option, you can purchase the shares at a reduced market price, often a substantial number of percentage point’s less than current market value.

Are You Qualified?

Employees have two different stock options available to them -- qualified plans and nonqualified plans. Typically upper management gets the qualified or incentive plans. These plans provide stock options based on the employee’s and the company’s overall performance. They also receive different tax treatment than nonqualified plans. The rest of the company typically receives the nonqualified plans.

Conclusion

Owning a stock that pays a dividend is a good way to reap a reward from your investments. As an investor, you don’t have to work for a company to buy its stock and receive any dividends when paid. With an employee stock option plan, you must work for the company in order to participate in the plan. Plus, the kind of option plan that’s available to you depends on your status within the company. If your company offers a stock option plan and the company’s stock pays a dividend, that’s an added bonus, but remember you don’t get the dividend until you exercise the option and can prove you are the owner of record on the record date. For more information stock dividend high dividend yield stocks

Article Source