What is a stock option and why is it valuable

What is a stock option?

A stock option is granted under a company's equity incentive plan (EIP). This stock option is a contract that allows you to purchase a set number of shares from the company at a fixed price. The purchase price or exercise price is based on the fair market value (FMV) the day the option was granted. You may exercise these options at specific times over the option term.

Why is a stock option valuable?

Stock options are valuable because they allow you to purchase shares at a fixed exercise price over the term of your option.  If, for example, your company's stock price increases after the option was granted, the value of your option has also increased due to the fact that you are able to purchase the stock at the lower exercise price. On the other hand, if the company's stock price has dropped and you have not exercised your option yet, you have suffered no losses.