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
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.
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)