The majority of a programmers pay is usually in the form of stock or stock option awards. As these awards are for a particular company’s stock programmers must actively manage their portfolio. In order to do so it is necessary to understand what the stock market is and how it generally operates.
Note: All information in this post is assuming publicly traded companies on either the NYSE or NASDAQ. Privately held companies which do not trade on the open market, and foreign exchanges are not covered. You should do your own reading on the rules of your exchange and country’s stock regulations if you are not in the US.
What is the Stock Market?
The stock market is best described by historical reference. Before the advent of a public marketplace all companies were private companies. This meant that investors in those companies would have to independently value their shares, find a willing co-participant, trade the shares, and collect their payment.
As you might imagine this severely limited the pool of potential investors and was otherwise risky (see counterparty risk), slow, and very very inconvinient.
To help with this situations investors created a literal marketplace, much like a farmers market where companies and investors could gather and buy and sell shares. In order to facilitate trade, they started listing the price a given company’s shares last traded for up on a board. This became the “market price” of a share in that company. Furthermore, as both investors and companies are composed of busy people, brokers arose who would go to the market for you and buy and sell you shares for a commission.
With the advent of modern communication systems it became possible for brokers to staff the market with representatives on the “trading floor” and call in the trades their clients wanted. This is the scene of chaos you see when you see traders shouting at each other movies or on TV.
It is important to note that these traders were buying and selling physical shares. That meant that someone had to physically deliver the shares to the buyer from the seller, and the money to the seller from the buyer. The period of time this would take could be quite long hence there arose the notion of the settlement period. By convention that is three (3) days in the US on the NYSE or NASDAQ.
As you might imagine this system was rife with fraud and other financial chicanery hence there arose significant regulation and private organizations to deal with it. The primary regulator of US stock markets is the Securities and Exchange Commission (SEC) and they set the rules that companies on the market must abide by, such as standard financial reporting requirements, trading practices, etc. The exchanges themselves set rules via the Financial Industry Regulatory Authority (FINRA), such as who will insure against counterparty risk, how brokers must operate, and so on. It’s good to know these systems exist, because changes in those rules have material effects on who can trade stocks and how the deals must be structured.
Great history lesson, how does it effect me?
The history outlined above has several effects on how your stock awards interact with the market:
- Your company will deposit your shares with a particular broker of their choosing. Unless you file the paperwork you will be subject to that brokerage’s rules (FINRA).
- You may be subject to insider trading rules such as stock black out period (SEC).
- You will not be able to access the funds from selling your shares for at least 3 days after selling them. (Settlement period)
- Your company will be making regular reports (quarterly) to the market participants that will materially effect the price of the shares.(SEC)
- Your company will be holding shareholder events that you can participate in as a co-owner of the company (SEC).
How do I actually trade?
The stock market is active Monday – Friday 9am EST – 4pm EST. All trades are performed inside that window, assuming you don’t want to do anything fancy.
Assuming you’ve had shares released to you, are following your company’s quarterly reports, looked at analyst estimates, and have decided it’s time to sell trading is fairly simple. You tell your broker you would like to sell X shares at Y price subject to a couple of conditions.
The first condition is the trade type. This can either be a “market” price trade, or a limit trade.
A market price trade is exactly what it says. Your broker will list them on the market at the last market price, and someone will buy them at that price. Three (3) days later the money will be deposited in your cash account at the brokerage.
A limit trade works differently. You set a limit that the share price must be above in order for you to sell and a time period you are willing to wait for. The trade will be open until that price is reached, and execute when it does so. If the stock does not reach that price before your time period expires the order is cancelled automatically. If you change your mind on the sale before the time period you can cancel it automatically and place a new trade instruction.
Upon execution the shares are sold, and three(3) days later the money gets deposited just like a market price trade
There are two time periods that are currently accepted by all the brokers I’ve seen. Good for the day, which expires at the end of the current trading day, or Good for 60 days, which expires 60 days after you make it.
Conclusion
The stock market is how you’re going to make your money. You need to be watching what the overall market is doing (e.g. going up or down), and specifically how your company is performing. Read your companies financial statements. Read financial analysts estimate on where things are going with your company and why. Decide for yourself if you agree or disagree. Remember you do have insider information, use it appropriately.
I encourage you to examine some of the macro economic factors that go into the current behavior of the market, and reading sites like the Wall Street Journal, Bloomberg, and the Financial Times will go a long way towards that.