Company Stock: Must own or Hard Pass?

By | 2016-06-22

Depending on the circumstances, owning company stock can be a great opportunity or a grave mistake. In this post, I am going to walk through my thought process and ask you to weigh in on my approach in the comments.

First I want to discuss my specific situation, then I will break down all the bullet points I consider.

My current employer offers an Employee Stock Purchase Plan (ESPP) that we can opt into, here are the rules of the plan:

  • Can contribute 1-10% of your gross salary
  • Must opt in during a 3 week window every 6 months. If you miss the opt in period you must wait until the next one
  • 15% discount off closing price of the first or last day of the buying period, whichever is lower
  • Money is collected from paychecks for 6 months before shares are bought
  • Can pull your money out at any point in the 6 months leading up to the buy date
  • Must hold the shares for 3 months

Example:

Offering Period: June 1st to June 24th – I decide to put 5% into the plan

Accumulation Period: July 1st to December 31st – 5% out of every paycheck is deposited into an account

Transaction Day: Closing price on July 1st is $50, and December 31st is $60, shares are bought at $42.5 (15% lower than July 1st price of $50)

Selling opens on April 1st

Reasons You Must Own Company Stock

Inside Information – Not condoning insider trading, but you have an advantage being inside the walls of the building and seeing first hand how the company is operating. Unless you are a manager or above you probably aren’t privy to sensitive information, but you have a better idea of how the company is doing than the average joe on the street. Use it to your advantage (obviously without breaking the law).

Discount – Most ESPP plans I have read about give a discount, if they give you the discount on the lowest price over a stretch of time it is hard to pass up. Some plans I know about do not offer a discount, but do not charge a fee to acquire shares.

Its Easy –  It took all of 15 seconds to fill out the paperwork and they do the rest, investing doesn’t get much easier than that! Assuming you know what your company does, pay attention to the earnings reports and watch the competition – you may not need to do any additional research before investing

One other thing I want to mention – it takes some fear out of the equation when the market or you particular sector goes through a correction. I wondered what happen inside a company that experienced a 10-15% drop in one day.

Having recently gone through a correction, nothing really changed inside our walls, sales is still selling, support is still answering calls and the technology team kept on developing product. Per the market, we just lost a ton of value but you would have never guessed it based on our actions.

Just goes to show that short-term market moves don’t mean much to an established company.

Reason Company Stock is a Hard Pass

Lots of eggs in 1 basket – If you are not Financially Independent, you are “invested” in your job for an income and health coverage already. Owning company stock as a portion of your Net Worth could tip the scale into the “hard pass” side.

Owning a stock in a single company is riskier than index fund type investments. Usually, I do not buy individual stocks for that reason alone.

Blackout Period – If something happens during the blackout period, you are screwed, nothing you can do but take the loss or wait for a rebound. Not a comfortable situation for anyone, especially for recent IPOs or companies going through a rough patch.

One other thing to watch for – the company kool-aid can be potent – just because you work there doesn’t mean you have to buy. Do your research, not all companies are honest with their employees or shareholders.

My Decision

For the last 4 years we have put 5% of our salary into the ESPP plan, and have done very well. Averaging over 50% returns on all stock sold to date. Our strategy has been to sell stock after 1 year of holding for a tax break. I did sell one batch early when our stock hit a record high and got hit with short term capital gains.

My wife works at the same company, essentially doubling our risk if something suddenly went wrong. 99% of our income and 100% of our health benefits are through the same place.

For the first time in 4 years we are actually below our last purchase price, currently by 8%. We are buying another round on July 1st. At that point we will have over $10k in company stock, making it around 11% of our Net Worth.

I plan to continue with our 5% investment, our company has a great growth history and doesn’t show any signs of slowing down. After experiencing a correction I am watching our movement much closer and will withdraw if things start to go south.

Please Weigh In

I really want to hear what everyone thinks – would you invest in company stock? If so, what percentage? Does the discount make it a “must own”? Does the blackout period make it to risky?  Let me know what you think of my decision and what you would change in the comments!

 

If you want more information on ESPP plans check out Ty’s post here!

Some products that can help you:

Acorns: Acorns is an automation app that collects and invests your spare change when you make a purchase. I connected Acorns to my checking account and my credit card. If you are interested in trying it, you can use my referral code here (both of us will get $5 in our account)

Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time! (I may be compensated if you use this link)

14 thoughts on “Company Stock: Must own or Hard Pass?

  1. Thias @It Pays Dividends

    I think that putting 5% in isn’t bad, as long as you are investing a good amount outside of the company stock. The discount can be too good to pass on entirely so capturing some of the company stock is a good idea. People get into trouble when all they do is invest in their company’s stock, which I know you aren’t since your savings rate is higher than 5%! ?

    Reply
    1. Apathy Ends Post author

      haha, yep we are definetely higher than 5%

      I agree, as long as we can continuously sell and don’t get trapped I am very comfortable with 5%, it is tempting to increase it to 10 though

      Reply
  2. Ty @ Get Rich Quick'ish

    A good ESPP is like free money! If your employer offers one, then it almost always makes sense to participate. The one thing I don’t love about yours is the 3 month waiting period – ouch! That could seriously damage any benefit gained from your discount and look back benefit. But with 50% gains, it sounds like you’re doing great!

    My ESPP allows for an immediate sell, which I take advantage of rather than holding long term. My only holdings of company stock come from an annual grant that my employer gives. I usually leave that granted stock alone unless I have a major expense; I’ll sell these shares to cover it.

    I recently blogged about what makes a good ESPP. Clicking on my name here should link to that post.

    Reply
    1. Apathy Ends Post author

      I really wish we had an immediate sell option, then it would be a no brainer to do the full 10%

      Great write up – I put your link in the post for anyone who wants more detail!

      Reply
  3. Jon

    I agree with the earlier comments. The 15% discount is too good to pass up and I think you have been handling it prudently so far. As time goes on, I would keep an eye on it to make sure it doesn’t become too large a percentage of your overall portfolio. You know what? The employees at Enron and Worldcom were all huge investors in their own company stock and NOBODY saw their implosion coming!

    Best of luck, in my opinion, you are doing a good job of taking advantage of the generous ESPP and still keeping your risk manageable.

    Reply
    1. Apathy Ends Post author

      Yea, at one point it was 25% of our portfolio, that was out of my comfort zone and we had to sell some (it contributed to paying a huge tax bill last year)

      Thank you!

      Reply
  4. Fervent Finance

    When people ask me if they should contribute to their ESPP, I tell them two things matter: 1) nice discount and 2) short holding period. I would say your plan does a good job matching those. I would sell the shares as soon as possible and forgo the preferable tax treatment, but I’m more conservative. Would rather lock in my gain at that point. Good work!

    Reply
    1. Apathy Ends Post author

      As long as we are up I may start selling right away to lock in profits, the extra cash will help max out our Roth IRAs

      Reply
  5. Z
    ZJ Thorne

    I have an ESPP option, but I just don’t feel good having so many eggs in one financial basket. I’m also a temp, which makes me feel more job insecure than most people. I’d rather just get my W2 wages from them and invest them elsewhere.

    Reply
    1. Apathy Ends Post author

      I can see your point since you are a temp, that might change how I approach the plan. If you leave our company, anything you previously bought is yours and the return anything in the accumulation phase so there is not much risk

      Reply
  6. The Green Swan

    My comfort level is right around 10% company stock for my entire portfolio. I get a bit uncomfortable when it’s higher than that. While I don’t get a discount, I bought some during very favorable conditions (the stock was at serious all time lows during the financial crisis).

    With the sweetheart discount available to you and your wife I’d probably be maxing that out and then selling after the blackout period and just keeping that cycle going.

    Reply
    1. Apathy Ends Post author

      I think that is a good place to put the peg in, as our net worth rises our ESPP holdings will obviously become a smaller percentage and we may be able to increase our withholdings (depending on our outlook)

      It is really tempting to put the full 10% in – 1 day to decide

      Reply
  7. Adam @CrispyCabbage

    I haven’t ever participated. Though I wish I would have when the deal was about as good as yours. They changed ours a few years back to virtually no discount (now that I read your article I’m gonna go back and doublecheck though). Funny thing is, during the same period I should have been in the ESPP I bought stock in my company in my 401k. Luckily I was able to liquidate that for a gain when I saw the light.

    Reply

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