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Options to purchase shares

A person may be given an option to take up shares in a company at a stated price provided he does so before a given date. Whether he does so or not depends on how the market price has moved or is moving. He could make a large profit immediately by selling the shares as soon as he takes them up. For this reason, options often have to be paid for. The larger companies frequently grant options to employees as a way of increasing their effective remuneration whilst at the same time reinforcing loyalty to the company that employs them. Although most of these options have in the past been afforded to directors and senior executives, there is an increasing tendency to offer them to more junior employees, sometimes through an employee shareholding trust. Options to purchase shares given to company promoters must be stated in the prospectus and those given to directors may be subject to the various constraints contained in the 1985 Companies Act regarding trans¬ actions between the company and directors. They must also be taken into account when computing directors’ emoluments.

Reference: The Penguin Business Dictionary, 3rd edt.