Should I buy my company’s stock?
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My company allows me to purchase stock at its price on the first or last trading day of the year-which ever is lower and at an additional 15% discount. I buy the stock through monthly payroll deductions and receive my shares the first few days of the following year. This is a great deal, especially in years when my company’s share price appreciates-my company’s stock was up over 20% in 2017! This meant after my 15% discount and taxes I realized a 30% return. Happy New Year to me!
Discounted company share purchase plans can be great investments but only under certain conditions:
- You don’t have alternative investment options that would give you a higher rate of return than the discount (minus taxes)
- You don’t have debt at a higher interest rate than the discount your company is offering
- Your company will immediately allow you to liquidate your purchased shares
Obviously, if there is a higher return vehicle you could be investing in or your company is offering a 10% discount but you have 20% interest outstanding credit card debt-investing in your company’s stock doesn’t make sense. But the third point is key-if you are in a non-executive level position at your publicly traded company-you need to be able to immediately lock in your return and sell your shares. The reason for this is that you don’t want to concentrate too much of your savings in the very same company that pays your salary and benefits. By holding large portions of your savings in the stock of the company you work for not only are you not diversified by holding a single stock you are too exposed to the future well being of your company. What if your company went bankrupt tomorrow and you had 40%of your portfolio in your company (Enron, Lehman…)? Not only would you lose your job and benefits but also 40% of your money-No! Diversify, Diversify, Diversify.
Being able to immediately liquidate your shares (and invest in well diversified index funds) is key. Some companies require you to hold purchased discounted shares for a set vesting period. Say you get a 10% discount but can’t sell for 2 years? That’s a lot of single stock risk to take on-what if it goes down 20% in that period and you have no control over whether to buy or sell?
Now if you are at the executive level in your company often a large portion of your compensation is in stock. The above guidance does not apply to you-as Chief Operating Officer you have far more control of the future direction of the company than a mid-level manager. Also, there are special insider trading rules you are subject to so you often cannot freely trade your shares. And as an officer of the company, your stock purchases and sales will be made public and directly impact share price.
Now, there is nothing wrong with employees owning company shares-it makes you feel like a company owner, not just a worker, with a true stake in the company’s future. However, it is best to limit the percentage of your portfolio in company stock to less than 5-10%. And I don’t care how much you believe in your company-if you aren’t receiving a discount-think long and hard about owning its stock-especially in your 401k! I have friend who loves the company he works for and 100% invested his 401k in his company’s stock which he purchased at full price! When he told me this I graphed his company’s stock price performance versus the S&P 500 via google finance over a 10 year period. Let me tell you he was devastated and immediately switched his allocation. Again, don’t be like my friend-never put all your eggs in one basket!