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Lesson 3. An Investing Primer > Options - Pg. 14

An Investing Primer 14 Keep Expenses Low There are expenses associated with investing, and keeping them as low as possible will improve your performance. Online brokers typically charge the lowest commissions, but if you are not comfortable with investing over the Internet, pick a discount broker to handle your transactions. Mutual funds, which are pools of investors' money managed by professionals, also pass on expen- ses to shareholders. Look for mutual funds with low expense ratios. Caution Brokerage fees and taxes that result from too much trading can eat up any profits in a hurry. Avoid excessive buying and selling. One of the biggest investment expenses can be taxes. How you plan for the tax consequences of your investments may mean the difference between a nice profit and a so-so profit. Employee stock options have their own set of tax consequences depending on the type of option. As I discuss the different types of options, I mention tax concerns and suggest ways to minimize them. Options As we discussed in Lesson 2, "Why Options Are Important," options give you the right to buy a specific number of shares of stock at a specific price within a specific period. Options granted under employee stock option programs are almost always different from the options traded on major stock exchanges. Companies do not issue those options. Investors can buy and sell those options on the open market. In most cases, employee stock options are granted to em- ployees of the company only and cannot be freely traded outside the company. One of the key points about options bears repeating: Employee stock options do not obligate you to do anything. Option Terms Options have their own terminology. The following are a few of the key phrases that you will see in documents about your employee stock options. · Exercise --Exercise is what you do to an option to convert it into stock. You exercise your options. · Exercise price --The exercise price is the dollar amount per share set by the company you pay when you purchase stock under an employee stock option plan. This is the same as the "grant price" or "strike price." · Grant --The grant is the name for the action taken by the company. For example, the company grants stock options at $25 per share. · In the money --This term refers to an option with an exercise price that is for less than the fair market price of the stock. For example, a stock option granted at $25 per share for a stock priced at $35 per share is "in the money." Like-wise, an option that is higher than the fair market price of the stock is "out of the money." Tip Don't give up on an option that is "out of the money." With enough time, the stock may rally and that worthless option will suddenly become valuable.