Legal Definitions - stock option

A stock option is a type of financial contract that gives the holder the right, but not the obligation, to buy or sell a certain amount of stock at a predetermined price within a specific time period. This right is granted by the company to its employees or investors as a form of compensation or incentive.

For example, let's say a company grants an employee the option to purchase 100 shares of the company's stock at $50 per share. If the stock price rises to $60 per share, the employee can exercise their option and buy the shares at the lower price of $50, then sell them at the higher price of $60, making a profit of $10 per share.

Stock options can be a valuable tool for companies to attract and retain talented employees, as well as for investors to potentially profit from the future growth of a company's stock.