Employee Stock Purchase Plan?

If you're buying 10% of your salary into it, and you can unload it piecewise (say, quarterly purchases) after a year, you shouldn't end up with more than 10% of your salary in it at any time. The question is what multiple of your salary you already have saved otherwise. If you have no savings whatsoever and you put 10% of your salary into this, you're way way overweight the company. If you have, say, twice your annual salary already saved up, then you're putting no more than 5% of your assets into the company (on top of your pay) - which is a level of risk that's not terrible.

It really depends on a variety of factors unique to your own situation - how risky the company itself is, how your financial situation is otherwise, etc.

I participated in just such a plan until I'd accumulated assets through it which added up to as much of a concentration in my employer's stock as I was comfortable with. Then I stopped. I didn't go and cash it out and then start again, though. I just sat on that stock, watched it appreciate even more, and sold it off around the same time I left that company. It wasn't a home run, but it was a decent and easy investment to make.

I'd recommend it as not a bad idea - *if* your situation and other assets make it not too risky. I'd definitely not make it my only savings, and I'd not let my investment in my employer build up to more than a small percentage of my overall investments - just like I'd limit my exposure to any single stock.

I guess that depends on the [strength of the] company and how good your crystal ball is.

It worked for me when I took part in such a plan from 1962-1966 (then the company discontinued the plan). I received stock at a 15% discount and have never sold it and have reinvested all dividends, the stock and it's derivatives are worth over $250,000 today. I just wish the company had continued the plan longer.

YMMV.

I used to work for a Big Chip Manufacturer :-) that had such a program. They collected your money from payroll deductions and then twice a year traded the money for stock at the 15% discount. You could sell your shares immediately, if you wanted, and they even had their employee stock program set up so that you could choose this option in advance. That's what I did; I didn't want any of my own money invested in company stock. I already had a pile of stock options from my compensation package, annual bonuses were based on company profitability, and given that it's what I do for a living as well I didn't even want any more investment exposure to the tech industry in general, thank you very much. I also note that Big Chip Manufacturer's stock price has declined something like 30% since the time I started work there 7 years ago.... you might save a few bucks on taxes by holding the stock for a year, but you might lose a pile of money by holding it, as well.

-Sandra the cynic

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As others have mentioned, I just sell the stocks as soon at the end of the period when I get the stocks. It nets about 10% in profits and I use it to fund my children college fund and some annual expenses, such as property taxes, homeowner and car insurance.

The period varies from company to company and in some it may not be possible to cash them in at the end of the period, but only after a while. I wouldn't purchase stocks through such a plan if I couldn't cash out immediately at the end of the period, because then I'd be subject to market fluctuations, when the 15% (or about 10% net) discount could easily vanish; not worth 2% in tax advantages. If the period were longer than 6 months I wouldn't either, because then it'd be just too long a time without liquidity.

HTH

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My opinion is that as you have termed your strategy, you are taking on a lot of risk for a 1.5% annual gain.

I would hold the stock longer in hopes of getting upside appreciation and improving the return. I would then counter this by diversifying other portions of portfolio.

Is the new employer a large cap, mid cap or small cap? If a large cap, my suggestion is to reduce overall large cap exposure in portfolio. If normal allocation to large cap is 30%, maybe reduce to 25% and hold company stock as other 5%. Most large caps move in tandem with each other, there is little additional risk taken relative to what you do now.

If new employer is a mid cap or small cap this is much harder. You are effectively overweighting a sector within that asset class. My suggestion would be to add a bond position equal to position in company stock. I would not reduce mid or small cap exposure (in mutual funds) because of where my company stock trades.

I would plan to hold for some time. As Ernie pointed out, company stock can be highly profitable if you hold it long enough (and company is a good company).

I work for a mega cap (we are world's 12 largest employer). Much of our revenue comes from overseas. I hold 4% of my 401k in company stock and dropped my large cap by 4% and foreign holdings by 4%. and added a 4% bond position. IMO this covers my asset allocation enough. I want to take this risk to get higher returns-maybe 20% when rest of portfolio only gets 8% type thing.

I think if you have enough assets (already invested), taking a risk with a small position makes sense.

If whole portfolio was 200k and gained 8% you made $16,000. If company stock was 20k (10% of above) and gained 20% you made $4000. Took 10% more risk and received 25% of the overall gain. IMO this is much easier to stomach with a small position in company stock.

Make sure you are rewarded for the risks you take.

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Actually it can be better than this. One company I was with set the discount at the beginning or ending price at each six month period, whichever was lower.. So in practice it was more like a 25-30% discount. So assuming a 30% short term gain hit for fed and state, you start out free 2% money if you max out. Thats a free week's pay.

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First, how often is the stock purchased? Is this plan annual? (My experience is every 6 months.) Is it 15% off the lower price of the two endpoints or just 15% off the end? You see, even with moderate volatility, the 'lower of two endpoint' rule will give you a chance at buying at a greater discount, at least half the time. And to jIM's point, it may be 1.5% bonus, but it's better than a 15% return on the invested money. Say the plan is annual, and you put in $100/month. Over 12 months it's $1200, but the average time you are out that money is 6 months (Maybe even 5.5) as you went from $0 to $1200 over the year. And the return is not 15%, it's 100/85 (as you bought at 15% discount) or 17.6%.

So your potential is 17.6% in an average 6 months holding time VS the risk you stock drops 15% before it hits your account so you can sell. Do stocks drop that much ever? Of course. You have to judge for yourself based on volatility and your own risk tolerance.

Joe

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I don't get this math. He buys a stock for 15% less than the ticker price. If there is no price fluctuation, why isn't his gain 15% when he sells? I must be missing something. Bill said his "bonus" was 1.5% because technically that's what the company is giving him, gratis. But if you or I saw a gain of 15% in a stock, which is what Bill is seeing, we'd call that a

15% gain, not 1.5%.

Elizabeth Richardson

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I would expect the return to be closer to 17.5%. I participated in a similar plan in which my employer offered company stock at a 10% discount. If there was no price change between purchase and sale, the gain was actually 11.11% (minus transaction costs and taxes). For example, if the stock was selling for $10/share, I could buy at $9. If I sell for $10, the gain is 1/9 (11.11%).

I could not sell for about 3-4 days after the purchase date. Therefore, my actual gains varied somewhat. It netted pretty close to the 11%. The transactions costs to sell where fairly low. I was buying $5,000 per quarter (max allowed), so the transaction costs were not a big impact. You also have to do some extra work when filing your taxes.

I used the gains to purchase a diversified mix of stocks/bonds, rather than concentrating an investment with my employer.

Steve

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I think Jim was thinking of this as a 1.5% addition to salary (10% of salary at 15% discount), which is actually a little higher as Steve points out.

-Will

william dot trice at ngc dot com

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I disagree *if* the OP is able to flip the shares upon receipt.

I have to disagree with this as well. I have participated in these plans before (however, the plan at my current employer is inside our

401(k) but offers no discount and a minimum 5 year holding period - why would anyone do that?) and I usually flipped my shares as soon as I received them. But I did that because I evaluated the company and decided that I wouldn't buy shares outside the plan, so why would I hold shares inside the plan? If the company is worth holding, that might be the right choice. But that's certainly not always the right choice.

-Will

william dot trice at ngc dot com

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That was my approach as well. In addition, even if a company's stock is "worth holding" by some random investor, it may make less sense for an employee to own the stock; having both job security and savings tied up in the same business seems like a Bad Idea to me. If your company also offers stock options as part of its compensation package, then you already have exposure to upside potential in company stock with no risk to your own savings if the stock price takes a nosedive instead.

Just my own $.02 worth, but the only situation where I'd feel comfortable holding company stock is if it's a small enough company where I can see a direct link between my own daily work and the company's profitability. That wasn't going to happen in a company with 80,000 employees, given that I wasn't in line to be the next CTO or whatever.

-Sandra the cynic

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I'm surprised how many of the replies have been in the sell-immediately school of thought, I've never seen comprehensive stats but it seems more common not to do that. Yes it does represent concentrated risk to own your employer's stock but depending on the company, that 15% discount, plus the fact that it's often applied to the low price of the purchase period, builds in a buffer. I do see people who sell their shares immediately for that near-infinite overnight return, but plenty of people (especially those with limited or no other equity participation in their company) choose to hold for the longer term. There can be a tax incentive to holding longer, if you're not familiar with all the rules I think fairmark.com covers it somewhere.

-Tad

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Yes, but IMHO 1 year from the purchase or 2 years from the beginning of the offering period is way too long a time to half the tax due, all the while exposing the 15% discount to market volatility. So the question is: take 10% net now or wait to take 12% net, if one's lucky.

In my case, I use it to pay car and homeowner's insurance and property taxes, so I cannot afford the risk, when selling immediately makes more sense. If I've got some months until such bills, I just put the money in a CD with the proper time-period and make even more profit on it.

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