Restricted shares are stock options with limitations on selling, such as a vesting period or specific events. Restricted stock grants require holding the shares until the vesting period is over. Choosing between restricted stock and stock options depends on the stock price. Failure to comply with restrictions results in loss of rights to vested stock.
Restricted shares are any type of stock option where there is some sort of restriction on the investor’s ability to offer the shares for sale to another investor. Restrictions may involve holding the shares for a specified period of time after purchase before offering them for sale. Other times, the restriction may require a certain event or series of events to occur before the owner can attempt to sell the shares.
With restricted stock options, the period or events that must pass before the shares can be sold again is known as the vesting period. Depending on the nature of the limitation, this period can be relatively short or last for several years. For example, if restricted securities were issued to an employee, the company may require that the employee remain with the company for a certain number of years in order to have the ability to sell those shares after leaving the employer. If the restriction relates to the issuing company achieving a certain level of annual sales or increasing the share price to a specific level, the restriction is lifted as soon as these events occur.
While limited stock is somewhat similar to a stock option grant, there are a couple of important differences. With the grant of stock options, the beneficiary has the option to buy or not buy the shares after the vesting period is over, usually at a guaranteed price. Once acquired, the investor can immediately sell the shares if he wishes. With the restricted stock model, shares are granted or purchased, then must be held until the vesting period is complete. Typically, a restricted stock grant will be slightly smaller than a stock option grant, in terms of the number of shares that are granted.
Determining whether restricted stock is the best choice depends on the price of the stock. If the price is currently rising in value, exercising a stock option grant, securing the stock, selling it at a profit is a good move. In situations where the price is somewhat static or is currently declining, the security of the restricted stock deal may be the best approach, as the stock will hold some value until the point where the price hits zero.
If a shareholder chooses not to comply with the terms and conditions that apply to restricted stock, he or she will incur some sort of loss. An employee who does not stay with an employer long enough to be considered vested in the stock program will normally lose all rights to any vested stock. For this reason, it is important to understand the nature of any restrictions that apply and what will result from failure to comply with those restrictions.
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