Companies with a stock purchase program can be a great benefit if used properly. Types of employee stock plans include stock options, Employee Stock Purchase Plans (ESPP), and Restricted Stock Units (RSUs). Each plan has different features, benefits, and tax consequences, so be sure to check with your advisor to understand if it makes sense for you to participate.
Regardless of the type of stock plan you have, there are a few things to consider if you participate.
Take advantage of the discount…
Often times, stock purchase programs include the ability to purchase your company’s stock at a discount. This is a hallmark of a good Employee Stock Purchase Plan. In an ESPP, an employee can usually buy the stock at a 10-15% discount, which means there is an immediate gain!
…and sell when you can.
Once you have purchased the stock, consider selling it as soon as you’re able.
In the case of an ESPP, the advantage is earned through the discount. While there may be tax benefits when holding the stock for a longer period of time, you increase your risk due to the potential loss from market fluctuations.
Another popular type of stock plan, Restricted Stock Units, allow an employer to gift stock to employees now with a future vesting date. Once the stocks vest, the employee is taxed. No additional benefit is realized by continuing to own the stock past that point.
Think of it this way—if your employer gave you a cash bonus, would you use it to buy your company stock? No. So why hang on to your company stock longer than needed if you received it through a stock plan?
Be realistic about the risks.
It’s easy to underestimate the risk of owning a single company stock. On the news, we see a big day in the market as being up or down more than 2%. But this is the average of a large portion of the market, like the S&P 500 Index. The volatility of a single stock is much greater.
Having too much of your net worth in one stock is called concentration. You are overexposed to the unique risks of that company—risks that can be diversified away without lowering your expected returns. In this case, not only is your job in the hands of your employer, but also your net worth.
Should I buy my company’s stock?
A good stock plan can be a great way to improve your cash flow, as long as you manage the risks by selling that stock as soon as possible. Managing the risks by diversifying away from a concentrated stock position is a smart way to invest.
For more information on your investments, consider scheduling an appointment with one of our wise financial advisors using the link below.