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What is a Restricted Stock?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2016
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    2003-2016
    Conjecture Corporation
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Restricted stock is any type of stock option where there is some sort of limitations placed on the ability of the investor to offer the shares for sale to another investor. The limitations may involve holding the shares for a specified period of time after purchase before offering them for sale. At other times, the restriction may require that a certain event or series of events take place before the owner can attempt to sell the shares.

With restricted stock options, the period or events that must pass until the shares can be sold again is known as the vesting period. Depending on the nature of the limitation, this period may be relatively short, or last for a number of years. For example, if the restricted securities were issued to an employee, the company may require that the employee remain with the business for a certain number of years in order to have the ability to sell those shares after leaving the employer. If the restriction has to do with the issuing company reaching a certain level of annual sales, or the stock price increasing to a specific level, the restriction is lifted as soon as those events take place.

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While restricted stock is somewhat similar to a stock option grant, there are a couple of important differences. With the stock option grant, the recipient has the ability to purchase or not purchase the shares once the vesting period is fulfilled, usually at a guaranteed price. Once acquired, the investor can sell the shares immediately if desired. With the restricted stock model, the shares are awarded or purchased, then must be held until the vesting period is complete. Typically, a restricted stock grant will be somewhat smaller than a stock option grant, in terms of the number of shares that are awarded.

The determination of whether restricted stock is the better choice depends on the price of the shares. If the price is currently increasing in value, exercising a stock option grant, securing the shares, then selling them at a profit is a good move. In situations where the price is somewhat static or is currently decreasing, the security of the restricted stock arrangement may be the best approach, since the shares will retain some value up to the point where the price reaches zero.

Should a shareholder choose to not comply with the terms and conditions that apply to the restricted stock, he or she will incur some sort of loss. An employee who does not remain with an employer long enough to be considered vested in the stock program will normally forfeit all rights to any shares accrued. For this reason, it is important to understand the nature of all restrictions that apply, and what will result from failing to abide by those restrictions.

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