ESPP:10% Discount & MSSB account [Morgan Stan. Smith Barney]

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ESPP:10% Discount & MSSB account [Morgan Stan. Smith Barney]

Postby shashiraj8 » Sun Mar 24, 2013 8:32 pm

Hello,

First, I would like to thank the forum for all the information provided in different articles / discussions. It has helped me immensely in my investment planning.

My company offers an ESPP managed by Morgan Stanlely Smith Barney (MSSB) and I would like to seek the forum's help in evaluating the ESPP. I have checked other discussions on this forum related to ESPP and majority of members have recommended to max out individual contribution and sell as soon as possible. My company's ESPP is a bit different, so I would like to share my analysis and seek feedback.

ESPP details:
Company contribution: 10% discount on stock price as of purchase date
Purchase Date: 5th of every month
Purchase frequency: Monthly
Maximum individual contribution: 15% of base pay
Sale of ESPP stocks: As per the plan document and my discussion with MSSB customer support, there is no minimum holding period and I can sell the stocks as soon as they are credited to my account i.e. once the purchase is made on 5th of every month, I am assuming I can sell them in a week or so
Expenses: Company shall pay the service charges, brokerage, costs of mailing and other charges incurred in connection with the purchase of stocks. The cost of selling stocks shall be borne by me. The total cost of selling stocks is in the range of $25-$50. MSSB customer support didn't provide information on how exactly the cost is determined, but confirmed that the selling cost will not exceed $50. A colleague was charged $26 for his recent transaction.

Monthly ESPP analysis:
Max contribution: $1250 ($625 per paycheck)
Stock Price: $100
Purchase Price (@10% discount): $90
No. of stocks purchased: 13.89
Company contribution: $139
To simplify the analysis, lets assume there is no change in stock price for a week
Sell Price: $100
$ Sales: $1389
Transaction charges: $25 (lower limit)
Short Term Capital Gain before tax: $114
Federal Tax @ 28% & Indiana State Tax @ 3.4%: (139+114) * (28% + 3.4%) ~ $79
(Tax Status: Resident alien...I love the terminology :happy )
Net Profit: $35 and the XIRR is in triple digits.

This is assuming the minimum transaction charge of $25 and no change in stock price.

Given the above details, is it worth participating in my company's ESPP?

Thank you for your feedback / suggestions.

Regards,
Shashi
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby mickcris » Sun Mar 24, 2013 10:24 pm

You may possibly be able to transfer the shares to a cheaper broker before you sell them for free. My ESPP allows that. I used to do it before the company that administers it lowered the cost of selling. The only problem is that it adds to the time that you have to hold the shares.
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby mhc » Sun Mar 24, 2013 11:43 pm

The discount on the stock is normal income. The will be on you w-2. You don't have to do anything for this.

The difference between the fmv on purchase date and sale price minus costs is capital gain.

Your example:
w-2: extra $139/mo
short term cap gains: -$25/mo (assuming no price change from purchase to sale)

net gain per month: $139*(1-.314)-$25*(1-.314) = $114*0.686 = $78.20
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby tfb » Mon Mar 25, 2013 1:44 am

shashiraj8 wrote:Short Term Capital Gain before tax: $114
Federal Tax @ 28% & Indiana State Tax @ 3.4%: (139+114) * (28% + 3.4%) ~ $79

You double counted the $139 in taxes. You should just stop at the $114 pretax number. That's the same as interest earned in a savings account. Ask yourself if you should skip over a savings account that pays $114 on $1250 every month.
Harry Sit, taking a break from the forums.
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby bogleblitz » Mon Mar 25, 2013 1:57 am

Yes Espp is a good deal.

Buy it and sell it right away the next day. Do not hold on to it.
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby dimdum » Mon Mar 25, 2013 1:58 am

What if you sell every two months ? The cost of selling should be same ~25$, as its usually per transaction.
Of course this has both down and up side, share price can go up for month 1 batch or it can go down too.
Month 2 batch you are selling immediately.
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Re: ESPP:10% Discount & MSSB account [Morgan Stan. Smith Bar

Postby shashiraj8 » Mon Mar 25, 2013 10:14 am

tfb
You double counted the $139 in taxes. You should just stop at the $114 pretax number...

[quote="mhc wrote:
The discount on the stock is normal income. The will be on you w-2. You don't have to do anything for this...


tfb and mhc,
Thank you for correcting the tax calculation.

Another thing I forgot to mention is that MSSB charges a $25 fee for direct deposit of sale proceeds into my account. To reduce cost, I will have to go with the 'check' option.

Thank you all for your response.
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