Restricted Stock

Loading the player...

What is a 'Restricted Stock'

A restricted stock refers to 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Cliff Vesting

    The process by which employees earn the right to receive full ...
  2. Vesting

    The process by which employees accrue non-forfeitable rights ...
  3. Graded Vesting

    The process by which employees gain a certain percentage of irrevocable ...
  4. Legend

    A statement on a stock certificate noting restrictions on the ...
  5. Graduated Vesting

    The accelerated benefits employees receive as they increase the ...
  6. Vested Benefit

    A financial incentive of employment that an employee is fully ...
Related Articles
  1. 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.
  2. Executive Compensation

    How Restricted Stocks and RSUs Are Taxed

    Many firms pay a portion of their employees’ compensation in the form of restricted stock or restricted stock units.
  3. Options & Futures

    10 Tax Tips For Stock Options

    Options and restricted stock are a great perk--if you don't get caught in a tax trap. Here's what you need to know.
  4. Taxes

    401(k) And Qualified Plans: Eligibility Requirements

    By Denise ApplebyAny business, including sole proprietorships, partnerships, corporations and government entities may adopt a qualified plan. An employee may not adopt a qualified plan, but an ...
  5. 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.
  6. Economics

    What is Restricted Cash?

    Restricted cash is cash that’s not available for a company to use immediately. It’s earmarked for some specific purpose.
  7. Options & Futures

    Employee Stock Options: Definitions and Key Concepts

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comLet's begin with the participants – the grantee (employee) and grantor (employer). The latter is the company that ...
  8. Taxes

    Is HD Vest Financial Services Right for You?

    Here's what you need to know about HD Vest Financial Services.
  9. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  10. Investing News

    Google CEO Receives $199 Million in Stock (GOOG, GOOGL)

    The CEO of Alphabet Inc.'s core search unit Google received around $199 million in restricted stock in on February 3, according to a company filing with the SEC.
RELATED FAQS
  1. What are restricted shares?

    Understand what a restricted share is. Learn why a company would issue restricted shares to employees and why an employee ... Read Answer >>
  2. How is trading volume regulated by the Securities and Exchange Commission (SEC)?

    Learn about how the SEC uses the trading volume formula as one requirement for an exemption to the ban on the resale of restricted ... Read Answer >>
  3. Can my company ever be entitled to take my 401(k)?

    Find out why your employer may be able to take part of your 401(k) if you leave your employment too soon, including how different ... Read Answer >>
  4. Why won't my broker allow me to sell one stock and buy another on the same day?

    There are two likely reasons why a customer would be unable to buy and sell a stock in the same trading day. For simplicity's ... Read Answer >>
  5. How do I determine a company's floating stock?

    Find out more about floating stock, outstanding shares and restricted stock, and learn how to calculate the amount of a company's ... Read Answer >>
  6. How can I minimize the tax hit from my company buyout?

    It was recently announced that my company was going to be purchased by another company. I'm very excited about this buyout ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center