Chances are, if you work for a large company, you have access to a comprehensive benefits package. There’s a reason for this! Your employer is always looking for ways to both reward and effectively motivate you, and he or she feels that if they can align your financial well-being with that of the company, it will motivate you to do your best and contribute positively to the company’s performance. One of the ways your employer does this is by offering an Employee Stock Purchase Plan (ESPP).
The Ins And Outs Of An Employee Stock Purchase Plan.
An ESPP is a program where your employer gives you the opportunity to purchase company stock, usually at a discounted price. Since your employer runs the program, they make it easy for you by withdrawing the money for the purchase automatically from your paycheck on a regular basis.
During the “offering period,” you accumulate payroll deductions; then during the “purchase period,” those deductions are used to purchase stock. Then you simply own company stock and can do with it whatever you see fit.
While your company offers it as a benefit, participating in the ESPP is not always the best choice for everyone. Here are some things to consider when deciding whether or not to participate in your ESPP.
Benefits Of An Employee Stock Purchase Plan
The most obvious benefit of the ESPP is that you can get stock shares at a discounted price. The discount varies by plan and can be as high as 15%. Some plans even offer a look-back provision that makes it possible to get an even steeper discount if the stock price has gone up during the offering period. In addition to the price discount, you don’t have to pay commission fees on the purchase, which saves you even more.
The stock market can be very intimidating for a beginning investor. In fact, a lot of people avoid investing because it is too confusing. An ESPP makes investing easy. All you have to do is tell your HR department how much you want to invest and they take care of the rest. You get automated, regular investments in a company that you’re already familiar with and trust.
Potential Tax Advantages
If your ESPP is a qualified plan, as most are, then you can also get tax benefits not available with other types of investments. You realize these benefits when it’s time to cash out and sell your company shares. There are certain rules that must be followed to receive tax benefits, so you need to become familiar with your specific plan before taking action.
The Risk Involved With Employee Stock Purchase Plans
As with everything, there are also potential downsides to participating in your ESPP. The major risk is one of the most well-known words when it comes to investing: diversification. Diversification is simply spreading your wealth around, not keeping all of your eggs in one basket.
If you’re mostly investing through your ESPP, then you could end up with a lot of your wealth tied up in only your company’s stock. That’s dangerous if your company performs poorly or even goes bankrupt. In general, it is better to have your wealth spread amongst various companies, or even types of investments, so one poor performer only has a minor impact on your overall portfolio.
Not only do you need to diversify your portfolio, but your overall financial well-being as well. Your regular income is already dependent upon your employer. Do you want all of your investments to be dependent upon them as well? If you have multiple income streams, then this may not be as much of a concern, but if you’re completely dependent upon your salary from this employer, it is an important thing to take into consideration. If something goes wrong, you don’t want to lose your job and all of your investments at the same time.
While they do offer nice benefits, ESPPs can expose you to more risk than necessary because of a lack of diversification in your portfolio and your overall financial life.
Questions To Ask Yourself
After considering the advantages and risks of an ESPP, you should ask yourself the following questions:
Would I be investing this money in stocks otherwise?
If there was no ESPP, what would you be doing with your money? If you would be investing it in the stock market, then the ESPP might be a great opportunity for you. But if there are other things that would otherwise be more important to you, such as paying off debt, then perhaps the ESPP is more of a distraction from your true financial priorities.
Would I invest in this stock without the ESPP?
In the end, the ESPP is an investment and should be treated as such. You should research your company just as you would any other investment. After doing your research, would you still choose to invest in your company? If your company is a poor investment, then even receiving a 5% discount on the purchase price may not be enough to make up for the lack of returns you would get with a superior investment. However, if your company is a good investment, then your returns will be all the greater for the discount you receive.
Seek Professional Help
While an ESPP can be a great opportunity, whether or not you should participate in yours depends on your own personal financial situation and goals. You need to make sure the ESPP aligns with both your short-term and long-term financial goals for it to be a wise decision.
An experienced financial advisor can help you determine how an ESPP can fit into your lifetime financial plan and whether your particular company’s is a good deal. If you have an ESPP you’re considering participating in or you already hold company stock and want to make sure it’s the right strategy for you, I’d be happy to discuss the situation with you! Call my office at (949) 221-8105 x 2128 or email me at email@example.com to set up an appointment today!
About Mike Loo
Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to make a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at firstname.lastname@example.org.
Mike Loo is a registered representative for LPL Financial (LPL) and an Investment Advisor Representative (IAR) for Trilogy Capital (TC). Securities offered through LPL, Member FINRA/SIPC. Investment advisory services offered through TC, a Registered Investment Advisor. TC markets advisory services under the name of Trilogy Financial (TF), an affiliated but separate legal entity. TC and TF are separate entities from LPL.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.