What are restricted stocks and how do I buy them?

Restricted stocks are stocks that can be purchased, though they have one or more restrictions to them. The ownership of those stocks is completed when the restrictions on the stocks are fulfilled.

An example of a restricted stock is stock that is sold by a company to an employee. The stocks are sold with the restriction that the employee must remain employed at that company for X amount of years. This also generally means the employee will be able to purchase the stocks at a lower rate.

This same thing can happen with a company expecting certain achievement levels from the employee or group and then they get the stocks.

If the restriction on the goal is not met then the stocks are forfeited. Some restriction plans will allow the restrictions to lapse gradually (for instance, an employee could buy 30% of the stock when the shares are 30% vested); others provide the restriction lapse all at once.

Employees can choose whether to be taxed when the restrictions lapse, in which case they will then pay ordinary income tax on the difference between the current price and anything they may have paid for the shares, or they can pay when the right is first granted. In that case, they pay the tax on the difference.

Some advantages to restricted stocks are as follows:

• Stocks can be rewarded for service and performance


• Restricted stocks can require fewer shares.


• Value even if shares prices decline


• Capital gains


• Shares can be divided or voting rights

Some disadvantages to restricted stocks are as follows:

• Restricted stocks can be a complicated approach
• The restrictions themselves may make the ownership seem less of a benefit
• The stock has no value until time of restriction is met
• Because of performance vested, the stock depends on external processes

One of the great advantages of these plans is their flexibility. However, that flexibility is also their greatest challenge. Due to the fact that they can be designed in several ways, many decisions need to be made about such issues as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares, eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any).

Restricted stocks can be acquired through corporate mergers, exercise of stock options, as bonus shares, or as compensation for services, but not through the public offering

Restricted stocks are not registered with the SEC and can usually be identified by a legend on the stock certificate restricting the manner of sale.

Sale of the shares will greatly depend on how and when the securities are acquired.

Restricted stocks are required through several avenues. Here are some places you can get them from:

• Gift


• Stock options


• Stock dividends or split


• Corporate reorganization


• Direct purchase from the company


• Partnership distributions


• Payments for services


• Private placements


• Venture capital investments

The typical sale process for a restricted stock is identifying the restriction, complete the documentation, request legal approval, place the trade, and obtain the clean stock certificate.

There are limits, and restraints on these stocks, however, there are many benefits that make the purchase of these stocks beneficial to the investor.

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