For many business owners and individuals, buying and selling shares is a great way to capitalise on a company’s growth and success. It has been an exciting time for Australian shares, which have started to rise recently. So, what better time to consider share options than now?

Let’s take a look at what you should know about these financial arrangements before discussing investments with your corporate lawyer in Melbourne.

First Of All – What Is A Share Option?

These are not the same as a share, i.e. a single unit of ownership in a financial asset or a company of which the value can go up or decrease depending on market factors. A share option is where the company grants the right (not the obligation) to the option holder of buying or selling shares in the business. A share option is in effect a contract to buy or sell a set number of shares for a set price at a predetermined date from the seller.

What Is The Role Of The Option Holder?

The right to sell is known as a put option and the right to buy is known as a call option. These rights always stay with the option holder, whether buying (call option) or selling (put option). The person granting the option is referred to as the option holder. Usually when buying, the existing shareholders and the business have to provide some additional approval before a new member enters into a share option arrangement. Option holders only have the right of buying or selling shares under a share option arrangement, so the new owners do not have ownership of shares until the option holder has carried out the option under the auspices of the share sale agreement.

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Why Are Share Options Popular?

Amongst traders, the popularity of share options rests on the fact that they need relatively less initial capital than normal share trading, and they also have the potential to earn larger amounts. Some employee incentive plans may offer share option plans so that staff have the right to buy a share at some point in the future. This is a way of retaining employee loyalty as well as keeping staff with the company reducing staff turnover and driving down costs of recruitment and training. These share option plans usually have what is known as a vesting condition which has to be satisfied before the employee can exercise their options. These vesting conditions can be based on achievement of certain milestones or time bound, for example, 20 years’ service with the company.

What Is The Difference Between Share Trading And Share Options?

The main difference is that it is up to the buyer as to whether the contract will be carried out. If you have an options contract to buy 500 shares of a stock before a fixed date, so rather than buy shares and paying out for brokers fees, you could just sell the contract on the open market and have the profit from that sale. Option traders very rarely buy and sell shares because they can earn their money from share price movements. However, this does take specialist knowledge in both the corporate and financial sector so it is important to speak to your corporate lawyers in Melbourne as they would have a wealth of experience in corporate transactions including share options.

What Are Option Shares And Contracts?

These are the shares in the business which are subject to the share option. There will be a share option agreement in place that sets out the price and number of these option shares when the option is exercised. Option contracts are known as derivative investments because you will be exchanging contracts and not buying or selling any physical assets. You don’t actually own any assets, unlike shares, but still aim to make a profit.

What is important is that the terms of any existing shareholder arrangements and the constitution of the business are carefully complied and reviewed before you enter into a shareholder arrangement. If you are looking to purchase a share option, then you need to know when you can or will be able to exercise the option. You also need to know the value that the option holds, and this must be written down. Having a corporate lawyer involved in this process is imperative as the agreement has to be binding and you need to ensure you are fully aware of what you are entering into before signing on the dotted line. Speak to the professionals today to get the best advice for your next financial investment deal.