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6 Things You Must Know About ESOPs Before Signing-up!

Have you come across employee stock ownership plans? Are you being offered one by your organization but are not sure what it is? Whichever is the case this article will tell you everything about ESOPs?

What exactly are employee stock ownership plans?

ESOP is the term that offers employees a chance to have ownership in the firm. It recognizes the best-performing employees and rewards them with an equity stake or cash based on an equity stake. If you have been offered ESOPs in your current organization, it means that the company values your contribution and they wish to make you direct custodians of the company`s long-term growth.

The definition of ESOP was originally introduced in the Companies Act, 1956, which underwent a complete change in the Companies Act, 2013.

There are two types of ESOPs- selective plans and all-employee plans. While the selective plan is only for the senior executives, all employee plans provide the same facility to all employees of the company.

Key Factors you must know before you Sign-up

a). Grant Price- One of the main benefits of getting access to ESOPs is the discount between the grant price and the fair market value, at the time of exercising ESOPs. The lower the grant price, the greater profits you can make while exercising ESOPs.

In the case of startups, the grant price is decided at the face value of the unlisted stock or as value by a Sebi-registered merchant bank. For companies that are listed, the grant price is decided based on the average stock price for a certain period before the issue date.

b). Vesting or lock-in period- ESOPs generally come with a vesting or lock-in period before you become eligible to exercise your option to purchase the stock. The structure varies, depending upon the organization and employee profile. Hence, it is essential to understand what the vesting rules are for the stocks offered to you.

Startups often offer a 1+4 vesting period, which is treated as a minimum period. It maximizes the contribution of an employee in line with the value of ESOPs offered and improves employee retention.

c). Exit Options- When an employee leave the organization before the lock-in period, they lose their right to gain ownership of the ESOPs at the discounted price. If you have vested a certain portion of the ESOPs, they will be held in trust and will be available only after maturity.

However, various myths and facts are revolving around ESOPs need to be addressed. Here are 3 facts every employer and employee must know about ESOPs:

1. ESOP is for Every Organisation

ESOPs are for every organization that is generating profit to support the annual costs of maintaining the ESOP. The profitability of the company is more important than a company`s size. In a profitable ESOP organization, the tax savings alone can be enough to offset the annual costs.

2. Offering ESOPs Does Not Effect Operations

Many company owners feel that after establishing an ESOP, they will have to consult their employees on regular basis regarding the company`s operations. However, the matter of fact is that the management remains in control of the company. Even when the ESOP owns a majority, there is no loss of control of the company.

3. Disclosure of Finances Is Not Required

An ESOP is a qualified retirement plan. Hence, the participants must be provided with the annual statement demonstrating the number of shares and the value for their benefits. No other financial disclosures are required by the organization to its employees who are share-holder.

The companies offer ESOPs to attract more qualified employees. They do it in a phased manner and provide stocks at the end of the financial year to reward their impressive performance.

Many companies startups and companies that can`t provide high packages, offer ESOPs to their employees. We hope we have shed some light on the current trending term- ESOPs.

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5 Common Mistakes Beginners Make While Investing In Stocks

Summary: The stock market offers ample opportunities for wealth creation. But is it easy for beginners? Find out 5 common mistakes that first-timers should avoid while picking stocks.

Invest in the stock market—-this was the millionth time Rahul heard this suggestion from his friend Sridhar when he asked about wealth creation. Trading, mutual funds, long day, short day, intra-day, and many other terms were thrown at him by Sridhar that amazed Rahul.

Rahul asked Sridhar how to invest in stocks and his dear friend asked him to open a Demat account. And as eager as he was Rahul begins his trading journey by investing in cheaper stocks without doing fundamental analysis.

Result? He lost INR 5000 in 2 days. Though Sridhar showed a great way to wealth creation, he should have told Rahul to avoid making hasty decisions. Investing in the stock market can be tricky, especially for amateurs. And for a new investor, it can be an alluring place.

For those who are new to this world, it might seem like gambling where people make and lose fortunes. But with the right approach and fundamental analysis of stocks, one can create wealth. The investment process has become hassle-free these days.

However, even with the fundamental knowledge of stocks, you can make these 5 mistakes as a first-time investor:

1. Not Understanding the Fundamentals of Stock Market

Ignoring the basic facts about the stock market can result in you losing your hard-earned money. Understanding concepts like ‘Going Long’, Going Short’, ask price, bid price, bid quantity, offer quantity, and stock price changes, PE ratio, PB ratio, dividend yield, a margin of safety, and many other factors.

To know everything about Share Market from the scratch, watch here:

2. To Not Have a Proper Investment Plan

Before you start investing, as a new investor you must have a proper investment plan. Being an amateur every stock and share will look promising. This can often make you lose direction by unplanned investments. Hence, it is very essential to understand your objectives and your financial goals. The investment objective is not subjective and every investor has their own financial goals.

3. Unaware About Risk Factors

The Share market is full of risks. So another mistake that first-time investors often make is that they do not decide how much they are willing to take risks. Investors who have a low-risk appetite may consider investing in stocks that have a low-risk appetite that provides stable returns and is less impacted by market volatility.

4. Wrong Risk Assessment

The stock market is exposed to high market volatility. So while trading online for the first time, it is best to strike a balance between unnecessary risk-taking and calculative risks. Sometimes beginners fail to know the margins they are willing to push while taking risks. Hence, understanding your risk-taking ability is of paramount importance.

5. Not Making a Diverse Portfolio

Many investors who trade online often fail to diversify their investments. They often fail to understand that investing in a single company or investing in only a single type of investment is never a profitable idea. A market crash or a single negative market movement can result in huge financial losses.

An ideal portfolio must comprise of stocks from different companies, along with investment in futures and derivatives.

Talking about money and growing it by investing in multiple stocks and companies may seem daunting at first. But with in-depth research and fundamental analysis of each stock before purchasing can give high returns.

So whether you are a beginner who has set goals and wants to invest in stocks to fulfill them or a professional who is aware of all the ups and downs of the market, if you don`t do enough research, you will end up raking in losses. The above-mentioned mistakes are probably common because often people ignore the basics. Keep these factors in your mind and be a smart investor.

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