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A stock option gives an employee the right to buy tock at a specific price within a specific time period Stock options come in two varieties: the incentive stock option (ISO) and the nonqualified stock option (NSO) Incentive stock options are not taxable to the employee at the time they are granted nor at the time when the employee eventually exercises the option to buy stock If the employee does not dispose of the stock within two years of the date of the option grant or within one year of the date when the option is exercised, then any resulting gain will be taxed as a long-term capital gain However, if the employee sells the stock within one year of the exercise date, then any gain is taxed as ordinary income An ISO plan typically requires an employee to exercise any vested stock options within 90 days of that person s voluntary or involuntary termination of employment The reduced tax impact associated with waiting until two years have passed from the date of option grant presents a risk to the employee that the value of the related stock will decline in the interim, thereby offsetting the reduced long-term capital gain tax rate achieved at the end of this period To mitigate the potential loss in stock value, one can make a Section 83(b) election to recognize taxable income on the purchase price of the stock within thirty days following the date when an option is exercised and withhold taxes at the ordinary income tax rate at that time The employee will not recognize any additional income with respect to the purchased shares until they are sold or otherwise transferred in a taxable transaction, and the additional gain recognized at that time will be taxed at the longterm capital gains rate It is reasonable to make the Section 83(b) election if the amount of income reported at the time of the election is small and the potential price growth of the stock is significant On the other hand, it is not reasonable to take the election if there is a combination of high reportable income at the time of election (resulting in a large tax payment) and a minimal chance of growth in the stock price, or that the company can forfeit the options The Section 83(b) election is not available to holders of options under an NSO plan The alternative minimum tax (AMT) must also be considered when dealing with an ISO plan In essence, the AMT requires that an employee pay tax on the difference between the exercise price and the stock price at the time when an option is exercised, even if the stock is not sold at that time This can result in a severe cash shortfall for the employee, who may only be able to pay the related taxes by selling the stock This is a particular problem if the value of the shares subsequently drops, since there is now no source of high-priced stock that can be converted into cash in order to pay the required taxes This problem arises frequently in cases where a company has just gone public, but employees are restricted from selling their shares for some time after the IPO date, and run the risk of losing stock value during that interval Establishing the amount of the gain reportable.



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For an investor in developed markets such as the United States, it is important to understand that these six emerging markets have moved through different stages in the course of their existence resulting in varying performance during these cycles (see Table 203) In the early stage, 1988 to 1994, developing economies were newly discovered and outperformed developed markets Then came the shock phase, when one market or an entire region went through political or economic rises Places such as Russia, Korea, and Latin America were hit especially hard Anxious investors dumped their shares in many of these countries TABLE 203





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We end our journey through the security process by returning to assessment We're back at this stage to discuss a final NSM best practice that is frequently overlooked: analyst feedback Front-line analysts have the best seat in the house when it comes to understanding the effectiveness of an NSM operation Their opinions matter!

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Heavenly Parachute Stock Option A nonqualified stock option that allows a deceased option holder s estate up to three years in which to exercise his or her options Hourly Rate Plan A method for calculating wages for hourly employees that involves the multiplication of the wage rate per hour times the number of hours worked during the work week Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA) A federal Act shielding employers from liability if they have made a good-faith effort to verify a new employee s identity and employment eligibility Immigration Reform and Control Act of 1986 A federal Act requiring all employers having at least four employees to verify the identity and employment eligibility of all regular, temporary, casual, and student employees Incentive Stock Option An option to purchase company stock that is not taxable to the employee at the time it is granted nor at the time when the employee eventually exercises the option to buy stock Individual Retirement Account A personal savings account into which a defined maximum amount may be contributed, and for which any resulting interest is tax deferred Individual Retirement Annuity An IRA comprised of an annuity that is managed through and paid out by a life insurance company Internal Revenue Code Refers to all federal tax laws as a group Internal Revenue Service A federal agency empowered by Congress to interpret and enforce tax-related laws McNamara-O Hara Service Contract Act of 1965 A federal Act requiring federal contractors to pay those employees working on a federal contract at least as much as the wage and benefit levels prevailing locally Minimum Wage An hourly wage rate set by the federal government below which actual hourly wages cannot fall This rate can be increased by state governments Net Pay The amount of an employee s wages payable after all tax and other deductions have been removed Nonqualified Retirement Plan A pension plan that does not follow ERISA and IRS guidelines, typically allowing a company to pay key personnel more than other participants Nonqualified Stock Option A stock option not given any favorable tax treatment under the Internal Revenue Code The option is taxed when it is exercised, based on the difference between the option price and the air market value of the stock on that day Outsourcing The process of shifting a function previously performed internally to a supplier who is responsible to the company for its ongoing operations and results.

Performance of Emerging Market and US Market Emerging markets +543% 55% US market +118% +125% Remarks Discovery years Political and economic issues: Russian crises and Asian contagion Technology boom and blight Global growth: rise of China, India, and Russia

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