Restricted Stock

AAA

DEFINITION of 'Restricted Stock'

Unregistered shares of ownership in a corporation that are issued to corporate affiliates such as executives and directors. Restricted stock is nontransferable and must be traded in compliance with special SEC regulations. Also referred to as "letter stock" and "section 1244 stock," it typically becomes available for sale under a graded vesting schedule that lasts several years. 

INVESTOPEDIA EXPLAINS 'Restricted Stock'

Restricted stock became more popular in the mid-2000s as companies were required to expense stock-option grants. Insiders are given restricted stock after merger and acquisition activity, underwriting activity and affiliate ownership in order to prevent premature selling that might adversely affect the company. An executive may have to forfeit his or her restricted stock if he or she leaves the company, fails to meet corporate or personal performance goals or runs afoul of SEC trading restrictions. The SEC regulations that govern the trading of restricted stock are outlined under SEC Rule 144, which describes the registration and public trading of restricted stock and the limits on holding periods and volume.

The taxation of restricted stock, governed by Section 1244 of the Internal Revenue Code, is complex. Restricted stock holders pay tax on the capital gain or loss represented by the difference between the stock’s price on the date it vests and the date it is sold. In addition, restricted stock is taxable as ordinary income in the year it vests. The amount that must be declared as income is the stock’s fair market value on the vesting date minus its original exercise price. However, the restricted stock holder may do a Section 83(b) election, which lets him or her use the price on the grant date, not the vesting date, for the purposes of calculating ordinary income tax. The tax bill must be paid sooner in this case, but it may be substantially lower if the stock appreciates between the grant date and the vesting date. The risk of taking this election is that if the restricted stock holder leaves the company before the shares vest, the shares are forfeited and taxes already paid are not refunded.

VIDEO

RELATED TERMS
  1. Registration Right

    A right which entitles an investor who owns restricted stock ...
  2. Vesting

    The process by which employees accrue non-forfeitable rights ...
  3. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form ...
  4. Section 1244 Stock

    A type of equity named after the portion of the Internal Revenue ...
  5. Forfeited Share

    A share in a company that the owner loses (forfeits) by failing ...
  6. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
RELATED FAQS
  1. What is the difference between a company's outstanding shares and its float?

    Understanding share counts, including outstanding shares relative to float, is an integral part of determining whether or ...
  2. What are unregistered securities or stocks?

    Before securities, like stocks, bonds and notes, can be offered for sale to the public, they first must be registered with ...
  3. How do I know if I am buying unregistered securities or stocks?

    All securities, including stocks, bonds and notes, must be registered with the Securities and Exchange Commission (SEC) before ...
  4. How do restricted stocks, treasury stocks and stock appreciation rights benefit employees?

    Restricted stock represents any equity that is conditionally given or sold to an insider as compensation or as part of an ...
Related Articles
  1. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  2. Options & Futures

    How Restricted Stock And RSUs Are Taxed

    This form of executive compensation limits how these stocks can be sold. Find out more here.
  3. Investing Basics

    Get The Most Out Of Employee Stock Options

    These plans can be lucrative for employees - if they know how to avoid unnecessary taxes.
  4. Investing Basics

    Introduction To Incentive Stock Options

    Here are some basic highlights of how ISOs work and the ways they can be used.
  5. Options & Futures

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  6. Options & Futures

    Employee Stock Options (ESO)

    Employee stock options are a form of equity compensation granted by companies to their employees and executives.
  7. Investing

    How The SEC Tracks Insider Trading

    We look at how the SEC tracks and tries to stop insider trading - a seemingly impossible task.
  8. Economics

    America's Most Notorious Corporate Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  9. Investing Basics

    What is the Stock Market?

    A stock market is where shares in corporations are issued and traded. Stock markets are key components of a free market economy.
  10. Investing

    Commercial Paper

    Commercial paper is a short-term debt security issued by financial companies and large corporations. The corporation promises the buyer a return, or profit, for making the loan. The return is ...

You May Also Like

Hot Definitions
  1. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  2. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  3. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  5. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  6. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
Trading Center