Well Jennifer, broken bones are rarely fun, (let's pause for a second to consider the rare occasions when they are fun :-) but I encourage you and all our readers to get out and get regular exercise of some form. You don't have to be insane like me, and maybe running isn't for you. But anything that is intense enough to get your heart rate up and long enough for you body to tap slightly into its reservese is a good thing. For starters, the carbs in your next meal will be used to replenish your reserves instead of being converted to fat.
But that's not what I wanted to talk about today. I'm getting a new car! Yep, I'm picking up a 2011 Ford Escape on Saturday. Some might call it a truck, but it's really a station wagon on stilts. Compared to the Chevy Cavalier I'll be trading in, it will give me a higher and more commanding view of the road as I sit idling in traffic, my hair blowing in the breeze of the fully functional heater. More importantly, it's less likely to be dragging its underside in the snow when our road isn't plowed in a timely fashion.
But actually, that isn't what I wanted to talk about either. Rather, there is a very curious manner in which this vehicle is being paid for. As I've said before, I write software for a living. You might think people buy this software and the company uses the proceeds to pay my salary. To a certain extent, that is true, but here's the rest of the story.
Part of my compensation is in the form of stock options. Basically, the company has set aside some shares of stock that I can buy at any time for a fixed price, which in turn is based on the value of the stock at the time the option is granted. So let's say my option price is $20.
Recently, the company stock has been trading at around $30. So here is the curious thing that happens: Somewhere somebody is collecting their weekly paycheck. A portion of this paycheck is diverted to their 401k plan. The 401k plan pools the money from multiple people and invests it in various company stocks. They offer $30 for 100 shares of my company's stock.
By sheer coincidence, I choose to exercise 100 options at the same time. So what happens is that I sell the 100 shares to the 401k plan for $3000. Immediately, $2000 is deducted from the proceeds to cover my cost of buying 100 shares at $20 each from the company. The US government then comes by and takes about half of it away as income and social security taxes.
So let's recap. $3000 goes into a 401k plan from people I've never met, which is then used to purchase my company's stock. My company ends up $2000 richer, the US government ends up $500 richer, and I end up with $500 of money to put towards a car (and I'll probably get some of the government's portion as a refund when I do my taxes). And there's now 100 more shares of company stock in circulation, which dilutes the value of all the other shares in circulation.
Share dilution is solved by the company buying back stock using proceeds from selling software. If the buy back happens when the stock has dropped to $10, it only costs the company $1000. Later still, when the stock has recovered to $20, those share are re-issued back to me and the cycle starts anew.
So what's the moral to all this? Investing in your 401k or IRA helps me buy cars. Thank you very much to all those who helped.
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