Unlike options that give employees an opportunity to buy into a company, restricted stock is direct ownership from day one. However, because of various limitations placed upon this type of stock, it is deemed restricted in nature.

These restrictions usually begin with a vesting period that determines when the stock can be sold. The vesting period can be determined by a time period or by certain goals that must be met. A typical time period might be 4 years of employment with the company before you can sell your shares. If you leave prior to vesting, then you will forfeit the restricted shares. In concept this is not unlike the vesting and forfeiture components of qualified pension plans.

When vesting is set by a goal, a time period may be irrelevant. For example, vesting may happen when sales exceed $150 million regardless when this occurs.

Once vested, you gain actual ownership of the stock. On the other hand, vesting in options doesn’t give you ownership, but only the right to exercise the options to gain ownership. Many employers believe this gives restricted stock a motivtional edge in directing their efforts toward company goals.

Also, consider that options can expire and become worthless. A downturn in company stock price can make the exercise of options unprofitable. Restricted stock always has the intrinsic value of the market price. Even with a dip in price, you can cash out your restricted stock with a profit. An option with a strike price of $25 doesn’t have any value if the stock is trading at $20 per share. Your restricted stock would still be worth $20 whatever the price at which it was granted.

Many companies are starting to replace their option programs with restricted stock awards. If you have been granted options in the past, restricted stock may well be part of your future.

Note, too, that the tax treatment of restricted stock is a little bit complicated. For this reason, it is recommended that you consult with a competent tax advisor whenever you are awarded any restricted stock.

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 29 years in the investment business.

He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network. Its web site is http://www.livingtrustnetwork.com

Copyright 2007. Living Trust Network, LLC. All Rights Reserved