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Restricted securities are stocks without full buying and selling rights. In most cases, these stocks have a limitation on them that will hopefully be lifted some time in the future. The most common method for restricted securities to enter the market is as a form of employee compensation. Until the restriction condition is met, the stocks have little to no actual value, but that does not mean they may not be bought and sold. Unless specifically prevented by the issuer of the restricted stock, the holder may issue options for purchase or possibly even sell the stock outright.
The main difference between normal and restricted securities is something called conditional value. The stock’s value hinges on a future condition; if the condition happens, the stock becomes non-restricted. If the situation never happens, the stock will never technically have value.
These conditions typically revolve around profit- or time-based factors. A profit factor is typically determined by the issuing company reaching a specific financial goal. This may be an annual or quarterly profit, the acquisition of certain assets or merging with another company. These types of restricted securities are often very lucrative for the holder, as it goes unrestricted right at a time when the company is doing very well.
Time-based conditions are generally more certain to happen, but their results may not be as good. These types of restrictions typically apply to the company as a whole or specifically to the employee. A company-based restriction is often simply a date when the stock loses its restrictions. In essence, if the company still exists, the stock is worth something.
Employee restrictions cover a wide range of possibilities. This type of restriction may revolve around an employee staying with the company for a certain amount of time or finishing a project by a certain date. In most cases, a time-based condition doesn’t necessarily leave the employee with valuable stock. Since the stock loses its restrictions regardless of the state of the company, the final version may be worth little more than when it was restricted.
Many companies use restricted securities as worker incentives. If the workers feel as though they have a vested interest in the overall profits and future of the company, they will work harder. By giving workers restricted securities that focus on specific in-house goals, the workers will strive to meet goals that they may have missed otherwise. These types of incentives also keep workers at a job longer than they may have otherwise; if they have stocks that don’t validate for another year, they are likely to stay if the potential value is high enough.