Drupal

Introduction

Restricted stock really has a lot more to do with people specifically working inside of a company than it does with the average investor that is not affiliated with a company outside of the investment, but at the same time it is good to know about restricted stock because it might come up when you are investigating a company in an attempt to determine whether or not investing in them is a good idea. Restricted stock has a history that is very long but the main reason that it is popular now is because it has been seen as the stock type that can put an end to a lot of the unethical insider trading that goes on in different companies between executives that have a large portion of their fortune invested in the company’s stock.

Restricted Stock

Quite simply put, restricted stock is stock that can only be sold when a particular set of predetermined conditions have been met. Before the advent of restricted stock, employees that were able to get shares at discounts of around 5% from their company were then able to turn around and sell those shares on the stock market and in doing so almost instantaneously make a 5% profit. Of course, this was not really good for companies since the rush to sell their shares on the market naturally created an excess of supply over demand and that in turn served to push the overall price of each share downward. A new way of doing things was required and that new way was the use of restricted stock.

The main condition that usually exists for the sale of restricted stock is some sort of financial milestone set by the company’s board of directors. Usually this is in terms of a gross income amount or a net profit amount and if either of these milestones are hit, then the employees within the company that own the restricted stock are then allowed to sell that stock and accrue all the benefits that the stock has grown during the time that the company was moving towards the milestone.

Advantages of Restricted Stock

While it may not seem so at first, there are actually some advantages to restricted stock. For the average investor, the main advantage is the fact that the employees are usually the ones with the restricted stock. This is beneficial for the average investor because it means that the employees of the company actually have a stake in the company doing well and they have a real stake in getting the company to that predetermined level. Restricted stock in this way provides a very real positive reinforcement incentive for the company to do well.

Another advantage of restricted stock is that aside from the restricted part of the stock, it can mimic either common stock or preferred stock or in some cases both. This means that in addition to the restrictions placed on the stock, the holders might be able to get voting rights, rights to dividend payments or even both depending on the company and the decision that they make.

Disadvantages of Restricted Stock

The main disadvantage of restricted stock is one that should be fairly obvious and that is namely the fact that the restricted stock could end up being worthless if the company ends up going down the drain. Because restricted stock can not be sold until the particular milestone is reached by the company, it is quite possible for holders of restricted stock to never be able to sell their stock because the company never ends up reaching the milestone. This makes restricted stock a bigger risk in that sense but of course since you are forced to hold onto the stock until it is worth a lot of money, that higher risk is balanced by a higher potential reward.