Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.
Another type of restricted stock is a form of compensation granted by a company. Typically, the conditions that allow the shares to be transferred are continued employment during a period of time, upon which they vest. However, those restrictions can also be some sort of performance condition, such as the company reaching earnings per share goals or financial targets. Restricted stock is becoming a more prominent form of employee compensation, particularly to executives. It has come to prominence as stock options have fallen out of favor after the perceived excesses of the stock market in the early 21st century.Restricted stock options have gained a position due to their advantages over common stock.
In the last years, there has been situations in which unethical employees have used inner knowledge of their companies for selling or buying stock at critical points in time. With restricted shares and accounting for restricted stock, this kind of occurrences simply disappear. But how do restricted stock options work and what they are, will be explained in the following paragraphs.
What Are Restricted Stocks?
Also known as letter stocks or restricted securities, it is a special type of stock. Regular stock can be bough or sold by their owners whenever they want. Their only limitation is the ups and downs of the market. There are several stock markets in the world dedicated to this kind of transactions. For example, the New York Stock Exchange (NYSE), the London Stock Exchange (LSE) or the Shanghai Stock Exchange (SSE).
In restricted stock systems, the stock can’t be transferred by the owner of the stock. The only way in which they can do use it when certain milestone or period of time has been reached. Since this kind of stock depends a lot on the performance of the employees of the company, it is replacing the role that common stock had for executive’s compensations.