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Owning an index stock is equivalent to owning a piece of every stock in the corresponding index, without the hassle of having to buy every single one separately. Some examples of index stocks are Nasdaq-100 (symbol: QQQ, also known as Qubes), which represents all 100 stocks in the Nasdaq-100 index; SPDRs (Standard & Poor’s Depositary Receipts, pronounced “spiders”), which contains all 500 stocks in the S&P 500 (symbol: SPX); DIAMONDS, which contains the 30 stocks in DJIA; and WEBS (World Equity Benchmark Shares), which represent shares in foreign indices such as those from Germany, Japan, and the United Kingdom. Other index stocks may be based on sectors such as the energy index, technology index, or oil index. Index Stocks are considered safer than individual stocks because of their diversity of their underlying stocks and are used by investors as a diversification tool.

Employee Stock Options (ESO)

Nowadays many companies use employee stock options to attract or retain talent. Just like warrants, employee stock options are granted to employees in fixed numbers with minimum and maximum exercise time limits. Usually a portion of these options can be exercised every year (depending on the company vesting rules) and the expiration date is long (10 years or more). Companies usually issue new common shares to cover the transactions by the employees. Just like warrants, if the stock does not surpass the exercise price of the option prior to expiration date, the options will expire worthless (as such has been the case where recently many Internet companies have faced declining stock prices). The good news in that case is that employees will not suffer a loss, compared to if they had bought company shares, since they are not obligated to exercise their options. Employee stock options have become a popular compensation strategy by companies, who can save money by using ESO instead of high salaries. They are also used as an …