Theres something about the stock market I don't understand. Take Howard Stern, when he went to Sirius Satellite Radio a few years back, Sirius made him a deal. If he could bring at least 10% of his regular radio fans to Sirius they'll give him stock options. He was able to bring a little bit more than 10% and they gave him stock options worth $370 million.

Now, my question is, does Howard Stern have to sell those stocks to use that $370 million? Or can he use the stocks themselves as actual cash. I mean, i"m sure he gets paid millions to be a shock jock on Sirius, but he recently purchased a home in the Hamptons for upwards of $20 million....i'm not so sure Sirius pays that well. So again, would he have to sell the stocks to use the $370 million?

excon

Hello j:

Well, as you described it, he only has an option to buy the stock at a certain price. The $370 million was what he could have sold the options for on the day he got them. Every day after that, the options were either worth MORE or LESS.

I don't know the price of the stock WHEN he got his option. It was selling for close to $8 bucks at its high in '04. But, today it's selling for $.57. If he got the options at the top, and still holds them today, his $137 million has shrunk down to $9 million.

The purchase of a home for $20 million would only require a down payment of about $2 million in this market, and he could borrow that using his options as collateral, from any bank.

excon

ebaines

Yes, he has to exercise the option and then sell the stock to get the cash. What one does to get the benefit of a stock option is (1) exercise the option - which means putting up cash to buy the shares from the company at the option strike price) - and then (2) sell the stock on the open market at the prevailing price. Steps 1 amd 2 can be combined to happen simultaneously, so you don't have to actually put up the cash to exercise the option to buy shares. Here's an example: suppose you have an option to buy 100 shares of XYZ company at $10/share, and the curent market price is $16. You exercise the option, basically putting up 100*$10 = $1,000 to buy the 100 options from the company, then you sell the 100 shares at $16 and get $1600 back. So you net $600 profit, less any income taxes due. Hope this helps.

jammixmaster

I'm still not sure I get it. Another example is Warren Buffet. Forbes estimates his net worth to be $63 billion (February 2008). His annual income is only $100,000. Most of his billions come from his shares in Coca-Cola and American Express. I think he owns $17 billion of American Express and $6 billion of Coca-Cola. Does this mean that in order to actually be able to use the $17 billion of American Express he'd have to sell it? And if so, in reality he doesn't have $17 billion, he has $17 billion in assets? UGH im so confused

Fr_Chuck

yes, he does not have the money if it is in stock, he would have to sale the stock or borrow against the stock to use the money.
Stock prices go up an down every day ( many times a day on some)

excon

Hello again, j:

That's because you think that a paper dollar is MONEY, whereas a paper stock certificate isn't MONEY. They're both the same. And, NEITHER of them is money. They're pieces of paper that you can exchange for real money. The paper itself isn't worth anything, so your paper only REPRESENTS wealth. It ISN'T the wealth itself.

REAL money is a storehouse of value. Since paper dollars have been losing their value, they're no more a storehouse of value than the stock certificate or your home these days.

A REAL storehouse of value would be those things that you can exchange for goods and services WITHOUT losing your wealth every time you change it in. Consequently, the only real money today is the only real money there ever has been, and that's gold.

I dunno if I've answered your question, or just confused you more.

excon

ebaines

One other point - usually in valuing one's net worth Forbes multiples the number of shares of stock the person has times its current market price, and ignore the tax implications of selling the stock. If Buffet were to actually try to sell $6B of Coke stock not only would that probably cause the market price of Coke stock to tank, but also he'd have to pay the IRS a percentage for taxes on his capital gain. Currently that percentage is "only" 15%, but who knows what might happen to that tax rate when a new administartion takes office. Bottom line is that his $6B in Coke stock isn't really worth $6B.

ScottGem

A share of stock represents a part ownership in a company. The value of that share is tied to the value of the company as a whole.

Stock certificates are not legal tender as paper money is. So to get legal tender, one has to sell the shares.

jammixmaster

Alright. Thanks for all of your help everyone. I think I understand now.