Employee stock option plan and employee stock ownership plan are considered as one but these two terms are very different.
Employee stock option plan v/s Employee stock ownership plan:
Employee stock option plan
Employee stock option plan is a contract between a company and its employees that gives employees the right to buy company’s shares at grant price. Grant price (also known as exercise price) is the price which is decided by the company. This right can be exercised within time frame imposed by the company and only a fixed number of shares can be purchased by the employee.
Employees get benefited from this plan when market price of shares are higher than the grant price.
Employee stock ownership plan
Employee stock ownership plan is a retirement plan in which an organisation distributes its share among its employees. These shares are held in common account and transferred to the employee’s account upon entitlement. In this plan, employees never purchase the shares directly or indirectly. These shares are transferred to employees account when they retire/ terminate from the company.
Employee stock ownership plans are used by companies for a number of reasons. For example to keep the morale of employees higher.
In case of amalgamation, purchase consideration is the agreed amount which transferee company (Purchasing company) pays to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash, shares or any other assets as agreed between both the companies.
For example, XYZ Ltd is purchasing the business of ABC Ltd for an agreed amount of INR 5000K and 100K shares of INR 10 each. Here, purchase consideration is INR 6000K (5000000 + 1000000).
Methods of Purchase Consideration:
There are four various methods which can be used in this calculation:
Net asset method –
Purchase consideration is equal to the total net assets of transferor company.
Total agreed amount of asset – Total agreed amount of liabilities
Net payment method –
Payment made to the shareholders of transferor company in form of cash, shares or debentures.
Lump sum method –
Fixed amount paid by the transferee company to the transferor company. This method does not require any calculation as the amount is decided by mutual consent of both the companies.
Intrinsic value/ Share exchange method –
It is calculated by dividing the net asset value of transferor company by price of one share of transferee company.
The result figure then divided by number of existing shares of transferor company to find out the ratio.
Intrinsic value – Net asset / Number of equity shares.
Everyone starts investing in share market to earn profit but most of them end up with losing their money. Share market is a game of intelligence and risk. If a person is not able to measure the risk factor or not willing to take the risk then there is no place for that person in share market.
In this article I am going to point out two big mistakes repeatedly done by investors while investing in share market. These two mistakes often result in loss of money and hope.
Investing a large portion of money in single stock:
This is one of the biggest mistakes of share market, Investors do on daily basis. Here I would like to focus on why this is done even by investors who have enough knowledge of share market?
The answer is quick return. In expectation of quick return we do this mistake and ends in wasting a lot of our money.Share market is game of patient people. People who waits for the right time to take action. For example: John has been investing in share market from last two years. In this time he has not earned any profit but he is tracking some stocks from last couple of months. These stocks are seeming quite stable to him. Now one day he finds that stock of ABC Ltd, which he is tracking is rising unexpectedly.For John it’s time to earn some profit as the time has come when one of the stock he is considering stable, is rising everyday. He waits for some time to make sure that rise is not temporary. John now takes the risk and invest 2/3 of his total investment in that stock by considering that:
It’s a stable stock (As he was tracking the same)
To earn in share market, risk has to be taken.
He has knowledge of share market (As he is playing this game from last couple of years).
John found that the price of stock has fallen for the day. But he just keep taking risk as this is the common scenario that the price goes up and down. Also he was not able to sell those share as it would have result in loss of money. But John is now facing the situation where he cannot sell the stock and stock price is going down everyday.
This is the second mistake comes in to picture when someone focuses his mind on earning profit quickly. Impatient here refers to by/ Sell in hurry and without doing much basic analysis.
This mistake is too common for new investors, who thinks they know a lot of share market. To earn profit quickly they just invest in stocks whose price is going up irrespective of the risk associated with these stocks.
Impatient may occur in these two situations:
When stock’s market price is more than the purchasing price:
This situation prevents an investor to make more money as the rise in price is not temporarily.
When stock’s price is lesser than the purchasing price:
This situation sometimes gives mental satisfaction (as investor has been holding the loss from last few time and now ready to accept it) but always results in monetary loss.
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