Employee stock purchase-am I missing something?

[Hedy]

Open enrollment for my employer's stock purchase plan is coming up, and I'm eligible for the first time. I'm planning on not enrolling, but I want to lay my cards on the table to make sure I'm not missing anything:
1. At present, I contribute 5% of my pre-tax income to my 401K, I am not yet eligible for a company match. I also contribute 15% of each net paycheck to my Roth IRA. I'm in my early 20's and one year out of college.
2. My employer's stock is not an exceptionally well-performing stock (Yahoo Finance has it's YTD performance as 2.9%). I would get the stock at a 5% discount.

Am I missing some reason why enrolling in the stock purchase plan is a good idea?

 

[txvjc]

Purchasing company stock is a long term investment for most companies, if you can buy it now at a discount on it and hold it, and hopefully your company stock will rise enough one day that when you sell you make a profit. I bought some of ours a few years ago with the same 5% discount, but with our stock price not really moving I figured that money would make me more in my 401K (which was doing very well). I sold it for bascially what I spent on it and thanks to the bad housing market and mortage companies folding our stock has dropped quite a bit. Do your homework and if you have faith in your company and the analysts agree BUY, but it takes self control not to look at the stock price everyday and wonder what my money was doing. I do reccommend maxing out you 401k contribution once you start getting a match.

 

[pearlieq]

I generally think participating in employee stock purchase plans is a bad idea.

You never want to put too many eggs in one basket, financially. Just working for a company puts a great deal of your eggs in their basket. Purchasing additional stock on top of that makes you even more dependent on your company's success.

If something were to happen (say an Enron, Tyco, or Arthur Andersen type scandal or even something smaller like bad new CEO, a devastating lawsuit, or new techonolgy that disrupts your market) you are not only out of a job, but your portfolio has also taken a major hit.

Why set yourself up for a double whammy like that? Especially since you're just starting out, focus on building a well balanced portfolio that doesn't favor any one particular stock.

 

[CEDmom]

If you have the option of getting an employer match in a 401(k) vs an ESPP you'll likely do better in the 401(k). The real key is what investments are available in the 401(k) and how carefully you stay on top of performance. The basic problem with an ESPP is that everything is tied up in one investment and you have no control over that.

 

[BethR]

Clark Howard - clarkhoward.com - is VERY much AGAINST buying company stock. I think for all of the reasons stated by pearlieq.

 

[lowie]

my dh works for target and their match is via company stock. hey, it's better then nothing!

 

[Hedy]

I generally think participating in employee stock purchase plans is a bad idea.

You never want to put too many eggs in one basket, financially. Just working for a company puts a great deal of your eggs in their basket. Purchasing additional stock on top of that makes you even more dependent on your company's success.

If something were to happen (say an Enron, Tyco, or Arthur Andersen type scandal or even something smaller like bad new CEO, a devastating lawsuit, or new techonolgy that disrupts your market) you are not only out of a job, but your portfolio has also taken a major hit.

Why set yourself up for a double whammy like that? Especially since you're just starting out, focus on building a well balanced portfolio that doesn't favor any one particular stock.

This is my biggest concern, but I didn't know if it was rational.

 

[Hedy]

Clark Howard - clarkhoward.com - is VERY much AGAINST buying company stock. I think for all of the reasons stated by pearlieq.

I just checked out his site. He likens company stock to gambling at a casino.

 

[Muushka]

But then there are some really great stock options. My husband received several hundred from his company at a greatly reduced price. Then Microsoft bought it.

Now that he works for Microsoft I think he can buy shares at a discount of 10%. Not too sure about that one. So a blanket statement that stock options are not too good is not accurate (Sorry Clark, and you know I love you to death ). If they offer them at a substantially reduced price, they can be great.

I emailed CH and one of his team members actually called me. A helpful call, very nice to speak with (but I really wanted to talk to the Big Cheese!)

 

[pearlieq]

If they offer them at a substantially reduced price, they can be great.

Options are different that ESPP. Options are usually given as a bonus or as part of a signing deal and are offered at a hugely substantial discount, sometimes for pennies on the dollar if a company is new or hasn't had an IPO yet. It's not generally something you contribute your own money to, but rather receive in addition to your salary.

Some people do great with them. A company DH works with just had their IPO and many millionaires were created that day. Of course, DH can also show you several hunded thousand worthless options from the failed dot-com he worked for . It's still a gamble, but at least you're not talking real money unless they are exercised. As long as you're not taking them in trade for a great deal of salary, they're fine.

But an ESPP, which has you take money out of your own paycheck and buy stock at a fairly modest discount (usually 5-10%) really isn't a good idea for most portfolios, especially not for a very young worker.

 

[Muushka]

Options are different that ESPP. Options are usually given as a bonus or as part of a signing deal and are offered at a hugely substantial discount, sometimes for pennies on the dollar if a company is new or hasn't had an IPO yet. It's not generally something you contribute your own money to, but rather receive in addition to your salary.

Some people do great with them. A company DH works with just had their IPO and many millionaires were created that day. Of course, DH can also show you several hunded thousand worthless options from the failed dot-com he worked for . It's still a gamble, but at least you're not talking real money unless they are exercised. As long as you're not taking them in trade for a great deal of salary, they're fine.

But an ESPP, which has you take money out of your own paycheck and buy stock at a fairly modest discount (usually 5-10%) really isn't a good idea for most portfolios, especially not for a very young worker.

Oops, learn something new every day! Thanks

 

[cats mom]

I agree with most everyone else. A 5% discount is not a lot to shout about.

We utilized our option to purchase stock at a previous job and did very well when we sold. We did not hold it long term however and it was in addition to other investments.

BTW, kudos to you for saving a substantial percentage of your income at a young age! The power of compounding is a wonderful thing.

 

[mareed]

But an ESPP, which has you take money out of your own paycheck and buy stock at a fairly modest discount (usually 5-10%) really isn't a good idea for most portfolios, especially not for a very young worker.

Wow! This really makes me appreciate mine! It's a 15% discount off of the lowest of this year's opening price or last year's opening price. So, if the stock is higher this year than last year, it's purchased at more than 15% discount. I invest the max allowed each year and turn around and sell it immediately! Guaranteed 15% profit (with some taxes taken out) and possibly more if the stock has gone up.

I do agree that holding on to the stock is just like gambling, so that's why I sell it right away!

 

[Hedy]

I agree with most everyone else. A 5% discount is not a lot to shout about.

We utilized our option to purchase stock at a previous job and did very well when we sold. We did not hold it long term however and it was in addition to other investments.

BTW, kudos to you for saving a substantial percentage of your income at a young age! The power of compounding is a wonderful thing.

Thant's what I keep hoping.

 

[crisi]

I think its a great investment - if it works like mine.

My discount is a guarenteed 15% - I get the price at the start of the offering period, or the price at the end of the offering period, whichever is lower, at a 15% discount. Its a six month period - so thats a 30% return guarenteed.
With a 5% discount and a six month offer, you are getting a 10% pretty much guarenteed return (there is about two days you "hold" the stock that you have some risk). Not as lucrative as mine, but there aren't many places you can get 10% safely.

You need to flip it when you get it in order to guarentee the return. We hold ours 18 months for tax reasons (I want to pay long term capital gains at less than half our tax rate rather than income taxes - for us holding it means about $5,000 a year in tax savings), but I do watch it - if it drops, I'd rather pay taxes than lose money. I can invest 10% of my salary - its the same as a 1.5% raise.

But, the saying "it takes money to make money" holds true. Our 401ks are already maxed out and we can afford to hold this money for six months. I wouldn't do it at the expense of a 401k, but if you can swing it, a pretty sound 10% return (assuming a six month period) (and ours has occationally outperformed - I've made as much as 30% in six months on that money) isn't anything to sneeze at.

Don't hold it though - you don't want to be overinvested in the company you work for.

 

[pearlieq]

Wow! This really makes me appreciate mine! It's a 15% discount off of the lowest of this year's opening price or last year's opening price.

Wow! That is a flippin' fantastic deal!

 

[M 'n C]

Hi Hedy! I think it just depends on your company and the industry they are working in along with are you risk adverse or a risk taker. I don't see anything wrong with a little stock but I wouldn't put a substantial amount in to any one stock.

 

[crisi]

Options are different that ESPP. Options are usually given as a bonus or as part of a signing deal and are offered at a hugely substantial discount, sometimes for pennies on the dollar if a company is new or hasn't had an IPO yet. It's not generally something you contribute your own money to, but rather receive in addition to your salary.

Some people do great with them. A company DH works with just had their IPO and many millionaires were created that day. Of course, DH can also show you several hunded thousand worthless options from the failed dot-com he worked for . It's still a gamble, but at least you're not talking real money unless they are exercised. As long as you're not taking them in trade for a great deal of salary, they're fine.

But an ESPP, which has you take money out of your own paycheck and buy stock at a fairly modest discount (usually 5-10%) really isn't a good idea for most portfolios, especially not for a very young worker.

And there are two kinds of options - non-qualified and incentive. That makes a difference as well.

Plus some companies give out stock grants - that's basically giving you company stock as a bonus - usually vests, so you can't turn it into immediate cash.

I like ESPPs, IF you can afford to put money into them and IF you flip them the first day you can (unless you need to worry about taxes). In which case, you are only holding your companies stock for about two days in order to get the discount - there isn't a lot of risk over two days.

 

[mareed]

You need to flip it when you get it in order to guarentee the return. We hold ours 18 months for tax reasons (I want to pay long term capital gains at less than half our tax rate rather than income taxes - for us holding it means about $5,000 a year in tax savings), but I do watch it - if it drops, I'd rather pay taxes than lose money. I can invest 10% of my salary - its the same as a 1.5% raise.

Don't hold it though - you don't want to be overinvested in the company you work for.

I agree with not holding it, and I do turn mine right around and sell ASAP unless the price has gone down (& this has happened before!). But in doing this, I don't have any capital gains (or very small) because the purchase price is the full price without the discount. Assuming I sell it at exactly the same price 2 days later, then there's no capital gains. They do withhold regular income taxes from the 15% discount amount, so I am paying taxes - just not any capital gains that come into play. I'm guessing that no taxes are withheld from yours, and that's why you're subject to capital gains? Just trying to understand what's different!

 

[crisi]

I agree with not holding it, and I do turn mine right around and sell ASAP unless the price has gone down (& this has happened before!). But in doing this, I don't have any capital gains (or very small) because the purchase price is the full price without the discount. Assuming I sell it at exactly the same price 2 days later, then there's no capital gains. They do withhold regular income taxes from the 15% discount amount, so I am paying taxes - just not any capital gains that come into play. I'm guessing that no taxes are withheld from yours, and that's why you're subject to capital gains? Just trying to understand what's different!

The 15% (or 5% or 10% or whatever gain you had on the sale if you were lucky and it went up) differential is taxed at ordinary income - if you hold it for eighteen months - its long term capital gains.