I'm an indexer, but should I be buying my companies discounted stock?

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TheBogleWay
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I'm an indexer, but should I be buying my companies discounted stock?

Post by TheBogleWay »

I'm an indexer, in the sense that I learned investing from this forum and all of my stock portfolio is total US (VTSAX) and total INTL (VTIAX) and some bonds.


However, I work for a company that has had steady positive growth, they offer 15% off stocks as employees. I believe in management and believe it's a solid company.


If you were me, would you be buying these stocks? I wonder if I should be for that 15% discount, as well as for the optics in case management ever checks to see who owns company stock.


Can you guide me a bit? If you would buy it, would you buy it with the intention of selling it once it vests which I believe is either a year or maybe even less like 3 months?


I have a high income (300+) and a now $1m stock portfolio of the before mentioned index funds. What percentage would you buy?
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Tamarind
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Tamarind »

Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
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TxAg
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by TxAg »

I'm always leery of too many eggs in the same basket.
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Stinky
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Stinky »

I'd feel comfortable with up to 5% of my invested assets in a single stock. Especially in one that I could buy at a discount, and sell at market price.
Last edited by Stinky on Thu Oct 17, 2019 9:01 am, edited 1 time in total.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by z3r0c00l »

Need to know the full details on how long you must hold the stock and any other limitations. 15% discount and 3 month term is a bargain, even a year is attractive to me unless you are working at a penny stock biotech or something super volatile.
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RickBoglehead
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by RickBoglehead »

Many buy their stock at the offered discount, and sell at a year so that the gains are long term.

Holding it past that is in violation of your investing guidelines.

As to whether management checks, if they do they're pretty small people. And, how would they check?
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by DesertDiva »

I bought company stock in the 90’s when I worked for megacorp. At the time, investment in this company was considered a no-brainer. The stock appreciated nicely until it peaked and the price went on a long downward slide. Fortunately I sold most of it before I would have lost money. I probably broke even. If I had waited a few months later, I certainly would have lost money in spite of the fact that I bought it with the 15% employee discount.

Purchasing company stock through an ESPP isn’t necessarily fool-proof. YMMV
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by dbr »

With three month vesting I would buy 15% and sell as soon as vested. At one year vesting I would probably not buy, but it isn't clear cut.

Disclaimer: At my company they offered instant vesting and everyone bought and sold 15%. They moved to one year vesting and I bailed at that point.

PS Your evaluation of the quality and success of your company is irrelevant to what the stock price is going to do. Also, only you can guess the optics of holding company stock purchase in your position. I was low enough in my company that I can assure anyone that what I did with company stock was of utterly no concern to management.
Last edited by dbr on Thu Oct 17, 2019 7:31 am, edited 1 time in total.
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CyclingDuo
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by CyclingDuo »

TheBogleWay wrote: Thu Oct 17, 2019 5:55 am I'm an indexer, in the sense that I learned investing from this forum and all of my stock portfolio is total US (VTSAX) and total INTL (VTIAX) and some bonds.


However, I work for a company that has had steady positive growth, they offer 15% off stocks as employees. I believe in management and believe it's a solid company.


If you were me, would you be buying these stocks? I wonder if I should be for that 15% discount, as well as for the optics in case management ever checks to see who owns company stock.


Can you guide me a bit? If you would buy it, would you buy it with the intention of selling it once it vests which I believe is either a year or maybe even less like 3 months?


I have a high income (300+) and a now $1m stock portfolio of the before mentioned index funds. What percentage would you buy?
Sounds like it could be well worth it to take advantage of the amount of your income that you can invest in the company stock at the discount, and then sell it for the 15% gain (before taxes). Even after paying the capital gains tax, you're not going to find any kind of savings account or CD that gives you that kind of return on (usually up to 10%) of your income. The danger being if your vesting period is a full year, the share price may not provide the 15% return. The small plan I participate in does not include a vesting period for ESPP, so I can sell right away to get the return. The RSU's, on the other hand, do have a vesting period.

Do you have both - ESPP as well as RSU's? As other posters have pointed out above, your salary already depends on your company and is enough in terms of diversification. Holding a large percentage of your portfolio in company stock beyond your salary is where diversification can get out of whack in spite of how well the company is doing or how you feel about the company. Could be well worth setting a limit on what percentage of your assets you want to devote to the company stock in your IPS. Some limit their holding to 5%, or 8% or even as high as 10% in any individual holding - be it company stock or an investment in another company within their portfolio.

The good news is you have excellent diversity with your index fund portfolio, so you could take on a small percentage of risk with the company stock that fits your IPS.
Last edited by CyclingDuo on Thu Oct 17, 2019 7:41 am, edited 1 time in total.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by alex_686 »

TheBogleWay wrote: Thu Oct 17, 2019 5:55 am However, I work for a company that has had steady positive growth, ...
This represents a group of very common behavioral basis. It is very hard to disentangle you personal emotion in your company to determining a correct price.

If you can afford the risk, buy at the discount, wait for a year for long term capital gains to kick in, then sell.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Rob Bertram
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Rob Bertram »

As most people have mentioned, take advantage of the 15% price discount that your ESPP offers. Sell when the shares vest, even if it means taking short-term capital gains on that 15%. Re-invest the cash according to your investment policy which sounds like a 3-fund mix of total-market index funds.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by jakehefty17 »

Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1

I do this with my employee stock purchase plan. They offer 10% off the lower price between the start of the quarter or the end of the quarter. I sell immediately for the 10% discount and pay the taxes in full.

From there it's invested into a taxable account and diversified via low-cost ETFs.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Dottie57 »

jakehefty17 wrote: Thu Oct 17, 2019 8:37 am
Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1

I do this with my employee stock purchase plan. They offer 10% off the lower price between the start of the quarter or the end of the quarter. I sell immediately for the 10% discount and pay the taxes in full.

From there it's invested into a taxable account and diversified via low-cost ETFs.
This. But used the money to help pay off mortgage.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by midareff »

I'd be buying hearty amounts every pay and selling as soon as rules permit. Look at it as a method of increasing your index buy by 15% every time you sell. :moneybag :moneybag :moneybag :moneybag :moneybag :moneybag
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by tjtv »

The 15% discount that you receive will ALWAYS be taxed at ordinary income rates regardless of when you sell. It has to be since it's not a capital gain, it's compensation that you receive for working.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by dbr »

midareff wrote: Thu Oct 17, 2019 8:55 am I'd be buying hearty amounts every pay and selling as soon as rules permit. Look at it as a method of increasing your index buy by 15% every time you sell. :moneybag :moneybag :moneybag :moneybag :moneybag :moneybag
I see the benefit as a salary increase of about 1.5%, which is nice but hardly earthshaking.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by bertilak »

Sure. Don't look a gift horse in the mouth. It's free money -- take it. Somewhere along the line you will be able to cash it in.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by dbr »

tjtv wrote: Thu Oct 17, 2019 8:57 am The 15% discount that you receive will ALWAYS be taxed at ordinary income rates regardless of when you sell. It has to be since it's not a capital gain, it's compensation that you receive for working.
I don't know why this is often confused. Maybe it has to do with comments about what happens to gains after the purchase if you hold for awhile.

The point that this is just compensation is exactly right.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by student »

Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by anon_investor »

bertilak wrote: Thu Oct 17, 2019 8:59 am Sure. Don't look a gift horse in the mouth. It's free money -- take it. Somewhere along the line you will be able to cash it in.
+1!
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by KlangFool »

TheBogleWay wrote: Thu Oct 17, 2019 5:55 am
However, I work for a company that has had steady positive growth, they offer 15% off stocks as employees. I believe in management and believe it's a solid company.
TheBogleWay,

1) Read the fine print: 15% off of what price?

A) Average of the beginning of the period and the end of the period?

B) The smaller of the beginning of the period and the end of the period?

C) The higher of the beginning of the period and the end of the period?

D) Something else

So, depending on which price, you may not be getting a 15% discount and make 15%.

2) What is the vesting period? How long before you can sell?

3) In general, buy a small amount and capture the profit immediately. Remember Enron!

KlangFool
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emlowe
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by emlowe »

Sounds like an ESPP plan - but you need to get exact details.
How much can you contribute per pay period? (10% of pay is a common limit)
How often are purchases done? (6 months is common)
How is the purchase price calculated? (some plans have a look-back feature)
Are there any fees involved in either purchase or sell?

and most important

How long must you hold the stock after purchase before you can sell?

There are been plans posted here that weren't particularly appealing because there were high fees to sell and a long holding period between purchase and sell.

However, a plan that allows you to sell immediately after purchase with low/zero cost, has a look-back feature for the purchase price, and with a 15% discount is essentially free money.
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AB609
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by AB609 »

In general, without knowing the details on your plan, I would say it is a good deal. I participate in my company's plan and it is an easy way to make a couple hundred extra bucks per quarter. It seems that there are different ways to administer these plans. My company does quarterly purchases that are distributed and automatically vested at the end of the quarter. Each paycheck gets a proportionate deduction for the quarterly purchase and the 15% discount is itemized on each paycheck as compensation and gets taxed as regular income. At the end of the quarter, soon after the stock is purchased and deposited into my account, I cash it out so there is little in the way of capital gains or losses.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by PDX_Traveler »

tjtv wrote: Thu Oct 17, 2019 8:57 am The 15% discount that you receive will ALWAYS be taxed at ordinary income rates regardless of when you sell. It has to be since it's not a capital gain, it's compensation that you receive for working.
+1
For this and other reasons I've always viewed ESPP as a component of income and used Quicksale type of mechanisms to sell as early as possible.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by MRMN »

Isn't your salary enough of an investment/return in your company?

If your company tanks -- your investment tanks, and your income goes away. Why let both of those things happen, even at a discount?

You may believe in your management, and you're probably not wrong, but would an outside investor have the same opinion? Don't let your biases influence your opinion.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by midareff »

dbr wrote: Thu Oct 17, 2019 8:58 am
midareff wrote: Thu Oct 17, 2019 8:55 am I'd be buying hearty amounts every pay and selling as soon as rules permit. Look at it as a method of increasing your index buy by 15% every time you sell. :moneybag :moneybag :moneybag :moneybag :moneybag :moneybag
I see the benefit as a salary increase of about 1.5%, which is nice but hardly earthshaking.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by CnC »

Imo with 1 mil in assets already buying company stock at a 15% discount is a no brainier.

Unless you feel that it is likely that your stock will dip more than 15% in a year you are guaranteed a profit.

What are the limits of how much you can buy?


At 1m in assets I would keep a rolling 25k in discounted company stock. Buy sell after a year buy more ect. If gives you a feeling of backing up your company, and is nearly guaranteed profit. I personally wouldn't let it ride though. Keep it small and profit.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by CnC »

MRMN wrote: Thu Oct 17, 2019 9:49 am Isn't your salary enough of an investment/return in your company?

If your company tanks -- your investment tanks, and your income goes away. Why let both of those things happen, even at a discount?

You may believe in your management, and you're probably not wrong, but would an outside investor have the same opinion? Don't let your biases influence your opinion.
At a 15% discount to market price with say a year vesting yes... An outside investor would 100% have the same opinion.

The OP could give me the name of his company and a brief description of what they are and do and I would likely be happy to buy ±10-20k worth of stock at 15% below market price assuming no limits on selling it in a year and 1 day.

As long as it's a public traded company with some history I would take a bet it won't drop more than 15% per year on average.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by softwaregeek »

student wrote: Thu Oct 17, 2019 9:00 am
Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1.
I dont think this is true. But the taxation of ESPP is quite complicated.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by deikel »

We should be clear, is your company publicly traded ? I think we all assume so, but that's not a given...

If not publicly traded then absolutely not - other then a small number of shares so you get the company fundamentals as a stock holder.

If publicly traded and a reasonable holding period of say 1 year, sure, buy to the limit of whet you can and turn it around, if the vesting is like 3 years I would be wary to invest too much, maybe make yourself a ladder - depending on what your vesting schedule is.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by rich126 »

Sure but don't accumulate too much. Years ago I did some contracting work at a well known electronics company. At the time the company's stock wasn't doing too well but the old timer was telling me "Yeah, it always goes down and then comes back strong." Well you know how that worked out. The stock never came back and the guy's retirement was delayed and he eventually had to come back after retiring because of money issues.

I doubt that will be a problem in your case with your earnings but don't get too greedy with "sure" things.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by shess »

PDX_Traveler wrote: Thu Oct 17, 2019 9:37 am
tjtv wrote: Thu Oct 17, 2019 8:57 am The 15% discount that you receive will ALWAYS be taxed at ordinary income rates regardless of when you sell. It has to be since it's not a capital gain, it's compensation that you receive for working.
+1
For this and other reasons I've always viewed ESPP as a component of income and used Quicksale type of mechanisms to sell as early as possible.
There could be differences depending on how plans are written, but when I had access to an ESPP, you could get long-term gains by holding for at least a year from the end of the offering period AND two years from the beginning of the offering period. Basically, you had to put some skin in the game to get the long-term treatment.

If you otherwise have existing holdings, perhaps from early-exercise of options, you can hold the ESPP shares and sell some earlier shares using specific identification. Of course, you'd hope those earlier shares have more gains, so that's not a clear win. But after awhile you can keep that rolling with just the ESPP shares.

{And, as I write the above, I find myself thinking that I wish I could go back in time and tell the 20-years-younger me that just committing to selling and a 3-fund portfolio would result in less worry and more time.}
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by student »

softwaregeek wrote: Thu Oct 17, 2019 10:17 am
student wrote: Thu Oct 17, 2019 9:00 am
Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1.
I dont think this is true. But the taxation of ESPP is quite complicated.
What is not true? My rationale is the following. I have two choices.

1) Do not buy shares. Then the expected value is 0.
2) Buy shares at a discount and sell upon vesting.

We should use 2) if the expected value after tax is positive. I am conjecturing that it is positive based on the given info.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by dcw213 »

Years ago I worked for a mid cap company that had a 15% ESPP discount. I participated for years and sold immediately (no holding requirement after purchase). Interestingly, the stock price on the quarterly date of ESPP purchase where employees could sell ALWAYS tanked by 4%+. Seemed odd to me as it was pretty clear that the whole company was dumping their ESPP on the same day. Eventually they implemented a one year holding period. I did it for a while but was amazed at the price volatility even during benign events in the macro economy and with the company. A few quarters the whole 15% disappeared. I probably yielded about 5% net of taxes during this period. Eventually I stopped participating due to the hassle factor and the time spent.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by ChowYunPhat »

KlangFool wrote: Thu Oct 17, 2019 9:08 am 1) Read the fine print: 15% off of what price?

A) Average of the beginning of the period and the end of the period?

B) The smaller of the beginning of the period and the end of the period?

C) The higher of the beginning of the period and the end of the period?

D) Something else

So, depending on which price, you may not be getting a 15% discount and make 15%.

2) What is the vesting period? How long before you can sell?

3) In general, buy a small amount and capture the profit immediately. Remember Enron!

KlangFool
Klangfool said it well. Understand the details of the program before you proceed. The best ESPP will have the 15% discount, apply the discount at the lower of the beginning or ending period offer price, and then immediately vest with option to sell. If this is your plan, contribute as much as you can and sell upon vesting. If there is a mandated holding period of a year or more, you will want to ensure you don't have too much concentration risk (<=5% of your overall holdings). Think of this as additional salary, not an investment and sell ASAP.

Your salary is outstanding at $300K. Although most public companies will not care about your holding of company stock until you're either (i) an officer or (ii) named executive in the c-suite that has a requirement for holding "1-2 years of their salary worth of stock" so don't let this notion influence your decision.
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TheBogleWay
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by TheBogleWay »

Thank you all yet again for your wisdom. I'm getting sudden FOMO!

I'll call tomorrow and get the details, might kick myself for not doing this earlier, from what I hear it's a good plan. I'll research more and be back.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Busdrvr »

If its an espp plan with a lookback and a short holding period then its an easy decision.

Just remember the irs limit is 25k/year based on 100% of the FMV so you can put ~21k of your own $ in. This would mean having a deferral rate of about 7% at your income. Any more and you are providing a free loan until the excess is refunded.

At a 30% tax rate you still clear nearly 3k per year just on the discount if the sale price is similar to the purchase price.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by softwaregeek »

student wrote: Thu Oct 17, 2019 11:45 am
softwaregeek wrote: Thu Oct 17, 2019 10:17 am
student wrote: Thu Oct 17, 2019 9:00 am
Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1.
I dont think this is true. But the taxation of ESPP is quite complicated.
What is not true? My rationale is the following. I have two choices.

1) Do not buy shares. Then the expected value is 0.
2) Buy shares at a discount and sell upon vesting.

We should use 2) if the expected value after tax is positive. I am conjecturing that it is positive based on the given info.
Sorry, the point was about ordinary income taxation. There is a 29 page guide from fidelity with diagrams that I used.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by student »

softwaregeek wrote: Fri Oct 18, 2019 10:56 am
student wrote: Thu Oct 17, 2019 11:45 am
softwaregeek wrote: Thu Oct 17, 2019 10:17 am
student wrote: Thu Oct 17, 2019 9:00 am
Tamarind wrote: Thu Oct 17, 2019 5:57 am Sure, buy it at a discount and sell upon vesting. Consider it alongside your other taxable investments.
+1.
I dont think this is true. But the taxation of ESPP is quite complicated.
What is not true? My rationale is the following. I have two choices.

1) Do not buy shares. Then the expected value is 0.
2) Buy shares at a discount and sell upon vesting.

We should use 2) if the expected value after tax is positive. I am conjecturing that it is positive based on the given info.
Sorry, the point was about ordinary income taxation. There is a 29 page guide from fidelity with diagrams that I used.
Thanks.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by GerryL »

bertilak wrote: Thu Oct 17, 2019 8:59 am Sure. Don't look a gift horse in the mouth. It's free money -- take it. Somewhere along the line you will be able to cash it in.
When I started at Megacorp I signed up for the stock purchase plan as soon as I was eligible. I knew NOTHING about investing, but figured I wanted to own a part of my company and get the 15% discount. I was maxing out my 401k and was able to max out the stock purchase as well.

If I knew then what I know now, I probably would have taken advantage of the instant sale option and reinvested the funds. But, for the most part, I let my company stock holdings grow. And grow and grow. Stock sank for a while, but I just left it and continued in the program, although I reduced the amount I was buying. Also packed in RSUs.
I eventually reduced some of my holdings and did some tax-loss harvesting when possible to balance the gains. Now 25+ years later and retired, the stock accounts for a healthy (not majority) chunk of my net worth, but my financial plan works without it, so it is essentially a slush fund that I use to feed my donor-advised fund -- and whatever else I want to do with it, keeping tax consequences in mind.

It all turned out well for me, but if I had had this Forum to learn from, I might have made different decisions along the way, but I would not have passed up the free money.
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Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by JBTX »

Yes I would absolutely buy at a 15% discount.
MathWizard
Posts: 4531
Joined: Tue Jul 26, 2011 1:35 pm

Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by MathWizard »

I'm not sure why so many are against this.

Generally questions about investing in single stocks is met with EMH arguments. That is, the stock is priced accurately.

So if the stock is priced accurately, and you get 15% off, according to EMH, you just made 15% .

I would not invest a large percentage of your portfolio in this, but it does not sound like you are going to.
Even if you put $50 K in, that is still less than 5% of your million dollar + portfolio, so worst case you lose 5%.

I don't think that this will move the needle much either way.
Gronnie
Posts: 285
Joined: Sun Oct 19, 2014 2:08 pm

Re: I'm an indexer, but should I be buying my companies discounted stock?

Post by Gronnie »

Any special stipulations?

My company's ESPP is a 15% discount, can contribute 15% of pretax salary, buy every six months and get a lock for the next two years at the buy price if it is lower than the buy price you are already locked in at, and can sell immediately -- which is about the most generous ESPP program I have seen. Many others offer much worse terms.
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