Buying Employer Shares

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dacoffee
Posts: 17
Joined: Tue Sep 26, 2017 7:03 pm

Buying Employer Shares

Post by dacoffee » Tue Oct 17, 2017 12:26 am

Hello,

My employer offers discount of 15% of company shares once a year. I was at lunch table with my colleagues and someone started this topic. It seems 70% of the group bought (discounted) shares. I had a the following conversation (will keep it simple for the purpose of this thread):

Colleague: So, I assume you bought some shares to take the benefit?
Me: err..no, I don't think buying shares of just 1 company make sense. I prefer diversification and don't want to buy individual shares for the sake of it.
Colleague: I am sure you can afford $500. That's no big deal.
Me: Well, every dollar in my account has a job. I will try to max out pre-tax 401(k) and then do Roth IRA with savings in Vanguard balanced funds. I really don't have spare $500.
Colleague: So, you can't afford $500.
Me: That is not the point. Why would I want to do that?
Colleague: You just missed the 15% discount my friend!

It seemed to me that I was talking french in the group. Do you folks make use of such benefits? I still think I didn't waste any opportunity, I don't know what is the value add in buying shares just "for the discount".

BTW, my company stock price is around $140.

Hope I didn't make a bad decision :(

sport
Posts: 6082
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Buying Employer Shares

Post by sport » Tue Oct 17, 2017 12:38 am

If you buy the company stock, how long do you have to keep it? A small percentage of your portfolio in one company is not a significant problem. If you are not required to keep it too long, you can buy it at a discount and then sell it later and reinvest in whatever you wish.

JBTX
Posts: 1530
Joined: Wed Jul 26, 2017 12:46 pm

Re: Buying Employer Shares

Post by JBTX » Tue Oct 17, 2017 12:39 am

dacoffee wrote:
Tue Oct 17, 2017 12:26 am
Hello,

My employer offers discount of 15% of company shares once a year. I was at lunch table with my colleagues and someone started this topic. It seems 70% of the group bought (discounted) shares. I had a the following conversation (will keep it simple for the purpose of this thread):

Colleague: So, I assume you bought some shares to take the benefit?
Me: err..no, I don't think buying shares of just 1 company make sense. I prefer diversification and don't want to buy individual shares for the sake of it.
Colleague: I am sure you can afford $500. That's no big deal.
Me: Well, every dollar in my account has a job. I will try to max out pre-tax 401(k) and then do Roth IRA with savings in Vanguard balanced funds. I really don't have spare $500.
Colleague: So, you can't afford $500.
Me: That is not the point. Why would I want to do that?
Colleague: You just missed the 15% discount my friend!

It seemed to me that I was talking french in the group. Do you folks make use of such benefits? I still think I didn't waste any opportunity, I don't know what is the value add in buying shares just "for the discount".

BTW, my company stock price is around $140.

Hope I didn't make a bad decision :(
I think you can make a fair case for nominally investing in a single firm with a 15% discount. When people say a well diversified portfolio is better than a single security, that assumes fair market prices for both. A 15% discount is not a fair market price and changes the calculus somewhat. The rules and benefits of diversification still apply, but your risk reward ratio of the discounted stock changes appreciably. If you can sell within a year, and the stock doesn't move at all, you make 15%. If the stock goes down 10%, you can still make (approx) 5%. While the risk in terms of volatility of price doesn't really change, the risk of loss greatly diminishes, making the discounted stock more attractive.

That said, if you can only buy $500 at a shot, you only missed out on a $75 opportunity. Big whoop. How often do you get the $500 option?

dacoffee
Posts: 17
Joined: Tue Sep 26, 2017 7:03 pm

Re: Buying Employer Shares

Post by dacoffee » Tue Oct 17, 2017 12:53 am

@JBTX

My employer provides this benefit 2 times in a year (October and Apr). I am not aware of any limit, I just used $500 as an example (but I can surely check my employer portal).

I am just thinking if this is something I should pursue or not. And if yes, what % of my portfolio should I consider for this type of investment.

oslocal
Posts: 17
Joined: Sat May 21, 2016 5:30 pm

Re: Buying Employer Shares

Post by oslocal » Tue Oct 17, 2017 1:29 am

I think these plans can be quite good. Usually the plans also give you the lower of the grant and vest date, so the discount can possibly be much more than 15%.
The tax treatment can be very strange however. If you sell within 2 years of grant date any price difference above the discount 15% would be ordinary income whereas after 2 years after grant and 1 year after vest that income would be long term capital gain. The 15% discount would only be taxed when the shares are sold (at ordinary income rate)

Ragnoth
Posts: 70
Joined: Sat Sep 17, 2016 8:10 am

Re: Buying Employer Shares

Post by Ragnoth » Tue Oct 17, 2017 2:19 am

This would depend on how long you have to hold the stock, and how much of your portfolio it will become (i.e., don't let it be more than 5-10% of your total savings), but my experience is that these are normally a pretty sweet deal.

Let's say the company lets you buy $10,000 worth of stock for only $8,500, and you have to hold it 1 year. Assuming this is a big public company, on average it will perform similar to the market as a whole (or the sector as a whole), and you walk away with $1500 in addition to normal maket returns when you liquidate at the end of the year and rebalance into index funds.

There is a risk it will underperform/outperform the market some years... but it's likely to come out in the wash in the long run, and you are being very well compensated for the added risk. As long as it's not a huge part of your portfolio, the impact of a bad year or two should be minimal (on the rare occasion you actually have a year so bad it underperforms the market by over 15%).

The trickier call are when they lock you in for something like 5+ years at a time before you can sell, or it vests on a schedule that is tied to your continued employment.

sailaway
Posts: 68
Joined: Fri May 12, 2017 1:11 pm

Re: Buying Employer Shares

Post by sailaway » Tue Oct 17, 2017 4:55 am

Ours vest immediately. They take a monthly sum out of the paycheck, but the purchase happens twice a year. This means that we have a rotating sum that is not invested, but does have a 15% return. We sell immediately to invest in index funds. As mentioned previously, we pay ordinary income tax on that 15%.

With the immediate vesting, we consider this a no brained. Further considerations are necessary based on vesting periods.

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DaftInvestor
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Joined: Wed Feb 19, 2014 10:11 am

Re: Buying Employer Shares

Post by DaftInvestor » Tue Oct 17, 2017 5:10 am

If they can be sold right away it is practically money in the bank - instead of thinking of it as an investment think of it as extra money in the bank - extra income you will get as a benefit of your position with very little risk. Search "ESPP" here to see many discussions on this topic.

aqan
Posts: 256
Joined: Fri Nov 06, 2015 7:07 am

Re: Buying Employer Shares

Post by aqan » Tue Oct 17, 2017 5:47 am

my firm offers ESPP at 15% discount too. I can invest 25K max receive a guaranteed 15% return + any gains in stock price since the beginning of grant period if sold immediately. If your company doesn't put any restrictions on the sale of the stock, I don't see you would reject a guaranteed 15% return.
IMHO - your colleague is 100% right. You should take full advantage of it and sell right away if you're so worried about diversification. You can always take the money out at the end the allocation period and invest in a diversified fund.

Jack FFR1846
Posts: 5771
Joined: Tue Dec 31, 2013 7:05 am

Re: Buying Employer Shares

Post by Jack FFR1846 » Tue Oct 17, 2017 6:35 am

If you can sell immediately, you are refusing free money. Why are you doing that?
Bogle: Smart Beta is stupid

BV3273
Posts: 212
Joined: Mon Oct 19, 2015 7:20 pm

Re: Buying Employer Shares

Post by BV3273 » Tue Oct 17, 2017 6:41 am

My old company offered 5% discount. Twice a year. No minimum holding period. I took advantage because I could sell the shares immediately. My new company had a 15% discount but they were recently acquired and put a hold on that benefit. It may be worth doing it if the holding period isn't long.

Dottie57
Posts: 2270
Joined: Thu May 19, 2016 5:43 pm

Re: Buying Employer Shares

Post by Dottie57 » Tue Oct 17, 2017 8:26 am

dacoffee wrote:
Tue Oct 17, 2017 12:26 am
Hello,

My employer offers discount of 15% of company shares once a year. I was at lunch table with my colleagues and someone started this topic. It seems 70% of the group bought (discounted) shares. I had a the following conversation (will keep it simple for the purpose of this thread):

Colleague: So, I assume you bought some shares to take the benefit?
Me: err..no, I don't think buying shares of just 1 company make sense. I prefer diversification and don't want to buy individual shares for the sake of it.
Colleague: I am sure you can afford $500. That's no big deal.
Me: Well, every dollar in my account has a job. I will try to max out pre-tax 401(k) and then do Roth IRA with savings in Vanguard balanced funds. I really don't have spare $500.
Colleague: So, you can't afford $500.
Me: That is not the point. Why would I want to do that?
Colleague: You just missed the 15% discount my friend!

It seemed to me that I was talking french in the group. Do you folks make use of such benefits? I still think I didn't waste any opportunity, I don't know what is the value add in buying shares just "for the discount".

BTW, my company stock price is around $140.

Hope I didn't make a bad decision :(
I've lost money/time with ESPP. One time stock went down bfore I could legally sell. I sold any ways, but lost. Second time I bought and due to ceo malfeasance, waited years to recover.

Not always guaranteed to work well. Most of the time it was fine and I used the sale funds to pay off mortgage early.

Helo80
Posts: 436
Joined: Sat Apr 29, 2017 8:47 pm

Re: Buying Employer Shares

Post by Helo80 » Tue Oct 17, 2017 8:39 pm

dacoffee wrote:
Tue Oct 17, 2017 12:26 am
Colleague: So, I assume you bought some shares to take the benefit?
Me: err..no, I don't think buying shares of just 1 company make sense. I prefer diversification and don't want to buy individual shares for the sake of it.
Colleague: I am sure you can afford $500. That's no big deal.
Me: Well, every dollar in my account has a job. I will try to max out pre-tax 401(k) and then do Roth IRA with savings in Vanguard balanced funds. I really don't have spare $500.

It seemed to me that I was talking french in the group. Do you folks make use of such benefits? I still think I didn't waste any opportunity, I don't know what is the value add in buying shares just "for the discount".

BTW, my company stock price is around $140.

Hope I didn't make a bad decision :(
(work with me on the gist of my message and not the fine details on how your ESPP works..)

If you really want to get screwy with the math, you could make an argument that investing $500 from Jan 2017 forward would provide a greater return than doing a Jan 2017 $500 paystub withholding to buy $575 worth of shares for $500 on Dec 31, 2017 while earning nothing on that $500 for all of 2017. Right now, VTSAX is up like 18.6% for the year. Additionally, the company could see a serious setback that tanks the stock and without reading how the 15% discount is calculated, it may not be all that great for the employees.

... but, it does not sound like your friend is approaching things from that angle.... otherwise he certainly could have explained that and I think it would have been at least a somewhat thought out comment.... not necessarily one I nor you might agree with entirely, but to throw him a bone...

That being said, when I worked for a company with an ESPP discount of 15%, they had to open enrollment periods per calendar year and had a very fair way of calculating the 15% discount so if the stock went up or down, there really was no way you'd pay more than the current trading price. There was a max set-aside that you could hit that I always maxed out as it was an easy 15% discount and we were allowed to sell the shares the date the company executed the trade on our behalf ---- there was no vesting period or anything. So, it was basically a free 15% minus trading fees and short term capital gains. I viewed the whole thing as free money and a bonus/incentive of being an employee.

drk
Posts: 96
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: Buying Employer Shares

Post by drk » Tue Oct 17, 2017 9:35 pm

My old company offered an ESPP with a 15% discount, but the minimum holding period was one year. I considered that unacceptable exposure, so I didn't participate. If there were no minimum holding period, or even something like a month, I would absolutely have taken advantage.

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