Today there are probably seven times that many employees participating in some 3,000 plans. You'll see these common terms. There are two common types of plans. ISOs qualify for special tax treatment. For example, gains may be taxed at capital gains rates instead of higher, ordinary income rates.
Nonqualified plans are special.
Unlike ISOs, nonqualified stock options can be granted at a discount to the stock's market value. There are three main ways to exercise options. You can pay cash, swap employer stock you already own, or borrow money from a stockbroker while, simultaneously, selling enough shares to cover your costs. It's usually smart to hold options as long as you can. Conventional wisdom holds that you should sit on your options until they are about to expire to allow the stock to appreciate and, therefore, maximize your gain.