What's the consensus on Employee Stock Purchase Plans?

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JD2775
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What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

The megacorp I work at is rolling out an ESPP for the first time. Employees get a 15% discount on stock purchases, and you can contribute automatically post-tax through payroll, up to 15% of your salary. Finally, you must hold the stock for one year prior to selling it.

I have heard its a "bad idea" to hold company stock in your 401k (unless its a really small amount) but I have no idea about ESPP's. Do you recommend them? Do you contribute to them yourself? Just curious.
sailaway
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by sailaway »

It is the one year holding period that makes your new plan iffy. However, that doesn't automatically make it a bad plan, just one you have to put more thought into. How is your emergency fund? Could you bear it if this stock lost money? What is your plan after the one year holding period?
nick evets
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by nick evets »

My megacorp offers it, and I've participated off and on with mixed results. For years when our price appreciated it was great. For years as our prices has declined, not so great.

I don't get a 15% discount, but a 5%, but even at a 15%...break even maybe. The hold period is pretty standard and you'd not want to pay short-term cg anyway, I wouldn't think.
DesertDiva
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by DesertDiva »

Here's a previous thread on this topic:
viewtopic.php?f=1&t=292777&hilit=ESPP
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

Thanks guys. My EF is fine and I can afford to buy a little each pay period but honestly I am not crazy about the idea of dealing with individual stocks (when to sell, how to sell, taxes to pay etc...). I would rather just keep putting money into VTSAX in my taxable account.

However if someone told me I was crazy to pass it up because of the 15% discount I may think differently.
alex_686
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by alex_686 »

JD2775 wrote: Thu Oct 29, 2020 12:47 pm I have heard its a "bad idea" to hold company stock in your 401k (unless its a really small amount) but I have no idea about ESPP's. Do you recommend them? Do you contribute to them yourself? Just curious.
If you can afford it - both in dollar amounts and risk - exploits it heavily. Make the maximum purchase, hold it for 1 year to get the long term capital gains treatment, then sell.

It is basically a free 15% return +/- market return.

What you don't want is to have your portfolio and your human capital having a big exposure to the same company. Plus everybody thinks that their company is great, ergo its stock must be great, leading to many behavioral errors.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
PaunchyPirate
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by PaunchyPirate »

The 15% discount is a good one. Mine was only 5%. But we were able to sell immediately, so there was little downside to participating.

I think ESPPs are not inherently a good or bad thing. If you do it and your stock goes up over that holding year, you're a winner. If the stock falls by 15% or more over that year, you're not so much a winner. If you have the spare cash flow, I'd probably suggest you do it for one year and see how it works out for you. You'll know how you feel about it better after the year.

If you participate and start buying/selling, there is a little bit of complexity at tax time, but I found that TurboTax handed it quite well without any problems. Keep your records and you'll be fine.
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HomerJ
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by HomerJ »

We get a 15% discount, but we can sell right away.

So I do... Sell the day we get them.

10% of your salary put into the ESPP, automatic 15% gain, let's say 10% after taxes... is 1% of your salary as a free bonus.

If one makes $100,000 a year, that's a free thousand bucks.

That's worth the extra hassle when doing my taxes

If I had to hold the shares for a year, I might not do it. Because who knows what they will be worth? Well, maybe I'd still do it... maybe.

Definitely sell after a year if you have a decent gain... Don't let too many shares pile up invested in your own company.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by Jack FFR1846 »

JD2775 wrote: Thu Oct 29, 2020 12:47 pm The megacorp I work at is rolling out an ESPP for the first time. Employees get a 15% discount on stock purchases, and you can contribute automatically post-tax through payroll, up to 15% of your salary. Finally,
you must hold the stock for one year prior to selling it
.

I have heard its a "bad idea" to hold company stock in your 401k (unless its a really small amount) but I have no idea about ESPP's. Do you recommend them? Do you contribute to them yourself? Just curious.
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anoop
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by anoop »

The 1 year holding period makes it iffy. If there was no holding period and you could sell immediately, then it's a no brainer. Personally, I would not do it with the 1 year holding period. If you get RSUs, then you now have an increased leverage in the company.
DarkHelmetII
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by DarkHelmetII »

Agreed 1 year holding not ideal however at 15% discount, and assuming monthly or quarterly purchases to spread the risk, I would do it.
boosnark
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by boosnark »

I hold all company stocks and RSUs in a separate account that is taxable. It's hard to pass up since my company matches 2 shares for every one I buy. I just reinvest the dividends and not touch them at all, and don't really figure them in my "real" investments (funds and index ETFs) when it comes to rebalancing.
Last edited by boosnark on Thu Oct 29, 2020 1:24 pm, edited 1 time in total.
davemanjam
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by davemanjam »

If the stock remains stable you have 15% free money.
But it sounds like the opposite is true. If you're that skeptical of the direction of the company I'd pass.

Also, consider diversification.
If the company is in a downward direction how safe is your job?
Do you want your personal success tied that closely to the success of your company?
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by brad.clarkston »

Do you hold it for one year or does the company?

For instance T-Mo has a six month hold on our 15% ESSP but they hold it the six months and then gives it to us so we can sell immediately.
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

brad.clarkston wrote: Thu Oct 29, 2020 1:29 pm Do you hold it for one year or does the company?

For instance T-Mo has a six month hold on our 15% ESSP but they hold it the six months and then gives it to us so we can sell immediately.
Here is exact wording...

• You must hold your purchased shares for one year prior to selling your stock.
• You can contribute up to 15% of your eligible pay through convenient payroll deductions on a post-tax basis.
• Shares can be purchased at a 15% discount.
• You can contribute up to $12,500 USD per Offering Period, and up to $25,000 USD annually.
• You will continue to be enrolled in ESPP unless you opt out. The cut off to opt out in the current Offering Period is the last business day of the month prior to the purchase date.
o If you opt out of the ESPP during the Offering Period, then choose to participate again in a subsequent Offering Period, you will need to re-enroll; otherwise, participation elections made will carry over to subsequent Offering Periods.


So the gist I am getting from some of the answers above is if I am going to do this.....then I should purchase this ONE time (i.e. one paycheck) at the maximum amount allowed and then stop it? Then, sell at 1-year?
willyd123
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by willyd123 »

I think you'd be a fool NOT to participate. Where else could you get such a deal (15% discount)? You should treat the benefit like a compensation source. If you can afford it and after you've maximized you 401(k) match if any, you should buy the maximum amount every year and then sell after the restriction period ends, repeat, etc. Over long periods of time, equity markets rise and with a 15% discount, it'd be difficult to lose (over the long haul). I did this with my former employer and it added a huge amount of money to my retirement savings.
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

willyd123 wrote: Thu Oct 29, 2020 1:48 pm I think you'd be a fool NOT to participate. Where else could you get such a deal (15% discount)? You should treat the benefit like a compensation source. If you can afford it and after you've maximized you 401(k) match if any, you should buy the maximum amount every year and then sell after the restriction period ends, repeat, etc. Over long periods of time, equity markets rise and with a 15% discount, it'd be difficult to lose (over the long haul). I did this with my former employer and it added a huge amount of money to my retirement savings.
Thanks. Im still not clear though on what people are recommending I do. Do I do this for ONE pay period? (with the maximum %allowed). Or do this for an entire year? If I do this for an entire year, I cant sell everything until the last purchase hits 1 year from that purchase date right? That could add confusion, buying 26 lots of stocks (26 pay periods)
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by davemanjam »

willyd123 wrote: Thu Oct 29, 2020 1:48 pm I think you'd be a fool NOT to participate. Where else could you get such a deal (15% discount)? You should treat the benefit like a compensation source. If you can afford it and after you've maximized you 401(k) match if any, you should buy the maximum amount every year and then sell after the restriction period ends, repeat, etc. Over long periods of time, equity markets rise and with a 15% discount, it'd be difficult to lose (over the long haul). I did this with my former employer and it added a huge amount of money to my retirement savings.
Difficult to lose? There are plenty of companies that go bankrupt including megacorps.
rich126
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by rich126 »

JD2775 wrote: Thu Oct 29, 2020 1:40 pm
brad.clarkston wrote: Thu Oct 29, 2020 1:29 pm Do you hold it for one year or does the company?

For instance T-Mo has a six month hold on our 15% ESSP but they hold it the six months and then gives it to us so we can sell immediately.
Here is exact wording...

• You must hold your purchased shares for one year prior to selling your stock.
• You can contribute up to 15% of your eligible pay through convenient payroll deductions on a post-tax basis.
• Shares can be purchased at a 15% discount.
• You can contribute up to $12,500 USD per Offering Period, and up to $25,000 USD annually.
• You will continue to be enrolled in ESPP unless you opt out. The cut off to opt out in the current Offering Period is the last business day of the month prior to the purchase date.
o If you opt out of the ESPP during the Offering Period, then choose to participate again in a subsequent Offering Period, you will need to re-enroll; otherwise, participation elections made will carry over to subsequent Offering Periods.


So the gist I am getting from some of the answers above is if I am going to do this.....then I should purchase this ONE time (i.e. one paycheck) at the maximum amount allowed and then stop it? Then, sell at 1-year?
People get concerned because you might have too many eggs in one basket (stock and your compensation). To me it isn't that different from couples who both work at the same company (concentrates income risk to one company). If you have a $250K portfolio and most of it is in your company stock then it is risky. Of course if it ends up being Apple, you won't care because you are now retired :)

I do find the phrasing interesting
Shares can be purchased at a 15% discount.
as opposed to "Shares will be purchased at ..."

I worked at Motorola (as its hey day was ending) as a contractor. There was an older guy who was trying to tell me about how its stock always comes back after it goes down. That was true until it wasn't true. He had to come back after retirement to work as a contractor due to a series of bad investments (Motorola and buying land during its peak out here).

People here can be a bit paranoid about things. There is some risk (20-30% in company stock) and then there is crazy risk (majority in company stock). Also depends on the company. Instinctively I would never go too far in with any company stock. A year isn't ideal but I'd probably put some into it.
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Nate79
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by Nate79 »

Look at the volatility of your companies stock over it's history. That will give you an idea if this is somewhat iffy or a horrible idea.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by brad.clarkston »

JD2775 wrote: Thu Oct 29, 2020 1:40 pm
brad.clarkston wrote: Thu Oct 29, 2020 1:29 pm Do you hold it for one year or does the company?

For instance T-Mo has a six month hold on our 15% ESSP but they hold it the six months and then gives it to us so we can sell immediately.
Here is exact wording...

• You must hold your purchased shares for one year prior to selling your stock.
• You can contribute up to 15% of your eligible pay through convenient payroll deductions on a post-tax basis.
• Shares can be purchased at a 15% discount.
• You can contribute up to $12,500 USD per Offering Period, and up to $25,000 USD annually.
• You will continue to be enrolled in ESPP unless you opt out. The cut off to opt out in the current Offering Period is the last business day of the month prior to the purchase date.
o If you opt out of the ESPP during the Offering Period, then choose to participate again in a subsequent Offering Period, you will need to re-enroll; otherwise, participation elections made will carry over to subsequent Offering Periods.


So the gist I am getting from some of the answers above is if I am going to do this.....then I should purchase this ONE time (i.e. one paycheck) at the maximum amount allowed and then stop it? Then, sell at 1-year?
You pick the % you want 1-15 of *each pay period* and then they remove the money per check. Companies rarely let you lump sum your desired dollar amount due to there taxes vs you doing it. I'm assuming the offering period is 6 months which means you would enroll in six month chunks.

Generally it's a good idea to do the ESPP your buying at a 15% discount in the hopes that when you sell your shares you make money. That doesn't always work out in your favor but 15% is a good chance.
willyd123
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by willyd123 »

I don't know that there's a definitive answer to your question as to buying via lump sum or over the course of the year. The way I handled it was each quarter I would buy 1/4 of the annual maximum (we had quarterly purchases with our ESPP). But to be honest I committed a bogle-cardinal sin a few times and bought the maximum amount as a one time lump sum because the overall market and our own company stock had fallen a lot. It was these ladder situations where I made a ton as the market and our stock headed north afterwards.

I see davemanjam has replied that plenty of companies go bankrupt. I had no idea! If this is your concern, you should put all your money in a safe. :happy

By the way, all of the above of course assumes that your company is a decently performing company, etc.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by inbox788 »

JD2775 wrote: Thu Oct 29, 2020 1:52 pm
willyd123 wrote: Thu Oct 29, 2020 1:48 pm I think you'd be a fool NOT to participate. Where else could you get such a deal (15% discount)? You should treat the benefit like a compensation source. If you can afford it and after you've maximized you 401(k) match if any, you should buy the maximum amount every year and then sell after the restriction period ends, repeat, etc. Over long periods of time, equity markets rise and with a 15% discount, it'd be difficult to lose (over the long haul). I did this with my former employer and it added a huge amount of money to my retirement savings.
Thanks. Im still not clear though on what people are recommending I do. Do I do this for ONE pay period? (with the maximum %allowed). Or do this for an entire year? If I do this for an entire year, I cant sell everything until the last purchase hits 1 year from that purchase date right? That could add confusion, buying 26 lots of stocks (26 pay periods)
There isn't a consensus. In general it's a benefit, sometimes small, sometimes less small. The risk is single stock concentration on top of your paycheck coming from the same source. Some folks think the risk is never worth it. I think it is in most cases. A lot depends on the specifics of the plan.

I say go full in to the maximum allowed for the main benefit (15% discount) and get out ASAP. Sounds like your max risk is $25k for one year, and you can sell the previous year as you fund the next. I figure 15% discount on 25k is about $3k/year depending on taxes, but it's not risk free. You just hope (and most stocks over long periods) will at least break even. You could get very unlucky and lose money.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by alex_686 »

Jack FFR1846 wrote: Thu Oct 29, 2020 1:19 pm Hard Pass
Why?

If I recall correctly, the taxability of the program is tied to its restrictiveness. You can't use a ESPP as a back-door employee compensation vehicle. So the 15% discount is offset by the 1 year holding period, neatly sidestepping any taxes.

So, both to OP and Jack - Let us take a look at this rationally. Key terms are bolded and underlined. I can point to more info if needed. Critically, what is the expected risk and return of the portfolio with the ESPP participation verse one without. We could construct a very simple portfolio. Portfolio 1 will be the S&P 500 and Portfolio 2 will be ESPP.

You should be able to find the Equity Risk Premium for the S&P. By default this will have a Beta of 1. You can get the Volatility from the VIX index.

You should also be able to find the Beta from the megacorp. If they have traded options - and most do - you should be able to find its Implied Volatility.

Portfolio 2 should have the higher expected return since it is given a 15% head start. Hard to say which portfolio is going to have a higher level of return. Portfolio 2 has lots of systematic risk, but once again starts off with a 15% head start. So semi-var (downside risk) may well still be lower than portfolio 1.
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alex_686
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by alex_686 »

JD2775 wrote: Thu Oct 29, 2020 1:52 pm Thanks. Im still not clear though on what people are recommending I do. Do I do this for ONE pay period? (with the maximum %allowed). Or do this for an entire year? If I do this for an entire year, I cant sell everything until the last purchase hits 1 year from that purchase date right? That could add confusion, buying 26 lots of stocks (26 pay periods)
So I just laid out a mathematical approach. The problem is that results in "corner" solutions. If the ESPP offers a better risk adjusted return than the S&P the solution tends to be a all-in approached. So the answer would be yes, max it out as soon as possible.

The issue is that I don't know if you can afford the risk. I think the answer is yes since you think you can put down 6k in a single paycheck, which suggests a high capacity to take risks. But this is for you to figure out. Just because you have a high ability does not mean you should be aggressive.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by MathIsMyWayr »

I also get a 15% discount on the lower of the prices at the start and the end of a 6 month period up to 10% of salary. It is a guaranteed minimum return of 15% over 6 months which I consider excellent. The effective annualized return is as high as around 60% if I remember correctly since you get a minimum return of 15% over a short period. I admit that holding individual stocks for one year is risky, but life is risky any way. I always participate to the max. I can take a potential loss of as much as 10% of my after-tax annual base salary.
Last edited by MathIsMyWayr on Thu Oct 29, 2020 2:39 pm, edited 1 time in total.
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

alex_686 wrote: Thu Oct 29, 2020 2:13 pm
JD2775 wrote: Thu Oct 29, 2020 1:52 pm Thanks. Im still not clear though on what people are recommending I do. Do I do this for ONE pay period? (with the maximum %allowed). Or do this for an entire year? If I do this for an entire year, I cant sell everything until the last purchase hits 1 year from that purchase date right? That could add confusion, buying 26 lots of stocks (26 pay periods)
So I just laid out a mathematical approach. The problem is that results in "corner" solutions. If the ESPP offers a better risk adjusted return than the S&P the solution tends to be a all-in approached. So the answer would be yes, max it out as soon as possible.

The issue is that I don't know if you can afford the risk. I think the answer is yes since you think you can put down 6k in a single paycheck, which suggests a high capacity to take risks. But this is for you to figure out. Just because you have a high ability does not mean you should be aggressive.
Ok, I completely mis-stated that. I cant put down 6k in a single paycheck. I wasn't looking at the math correctly. I can safely afford maybe 4-500 a paycheck for this. Maybe I will try with that.

It's a good company I think, and I am not worried about it going bankrupt anytime soon
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by Jack FFR1846 »

alex_686 wrote: Thu Oct 29, 2020 2:09 pm
Jack FFR1846 wrote: Thu Oct 29, 2020 1:19 pm Hard Pass
Why?
Sorry, I am ignoring everything that followed.

If the company goes into the toilet, you can do nothing but watch your shares go towards zero.

I was in a company where this happened. Not to zero, but from $48 to $12 in weeks. Big tech company. You know NOTHING about your company. Unless you're in an insider trading position, you know nothing.

If there were a 1 week holding period, I'd be squeamish. A month....pass. The OP is at a year. Hard Pass.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by KyleAAA »

If there's no holding period, the consensus is they are a no brainer. A 15% discount with a 1 year holding period I would probably still do if you were in a stable or growth industry.
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

Nate79 wrote: Thu Oct 29, 2020 2:00 pm Look at the volatility of your companies stock over it's history. That will give you an idea if this is somewhat iffy or a horrible idea.
Good point. The company is a spin-off from another MegaCorp, and since spin-off the stock has risen ~10% over the 2 year period since it went public.
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JD2775
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by JD2775 »

ahhh, maybe Ive been looking at this incorrectly. From a google search...

ESPPs typically have either a 12- or 18-month offering period comprised of two or three six-month purchase periods. Once you enroll, your payroll contributions accrue until your employer uses the accumulated funds to purchase company shares on your behalf on the last day of each purchase period

So it sounds like I am not actually purchasing stock every single pay period, but it is accruing until the end of the purchase period and then I receive the shares all at once?

If so, that makes much more sense to me, and I can see how easy it would be to manage the selling at the 1-year mark.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by alex_686 »

JD2775 wrote: Thu Oct 29, 2020 2:43 pm
Nate79 wrote: Thu Oct 29, 2020 2:00 pm Look at the volatility of your companies stock over it's history. That will give you an idea if this is somewhat iffy or a horrible idea.
Good point. The company is a spin-off from another MegaCorp, and since spin-off the stock has risen ~10% over the 2 year period since it went public.
That is not volatility. Besides, you want forward looking volatility, not backwards. I am going to use AAPl as a example. You should be able to see that "at the money" options where the expiration date is greater than 3 months options are priced around 40%.

https://finance.yahoo.com/quote/AAPL/options
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BrooklynInvest
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by BrooklynInvest »

I've worked for a couple of mega corps and done this with fairly small amounts. My rationale -

- Blue chip, well regarded companies

- I like discounts

I've probably broken even versus market return and endured a LOT of volatility. With hindsight I wouldn't bother doing it again.
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GerryL
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by GerryL »

I participated in an ESPP for about 20 years at my former employer. The plan purchase went through every 6 months using the $$ that we had withheld from each paycheck in that period. We got a 15% discount and could do an instant sale if we selected that option ahead of time. No required holding period.

I never did the instant sale. I knew nothing about selling stocks and how they were taxed. But I never put more into the ESPP than I could comfortably afford after maxing my 401k and Roth. And I never reinvested dividends to buy additional shares. Gradually my holdings ballooned with the addition of RSUs, and I did educate myself and executed a few sales of long-held shares over the years. Still, I retired with a big stash of company stock and used the dividends to help hold me over until SS started. Now I am using them largely to fund my DAF.

If I had it to do over again, I probably would have educated myself soon and limited how much of my net worth was in company stock. (But the growth of my portfolio over the years eventually mitigated that imbalance.) Based on my experience, I would say:

Gauge your confidence in the success of the company (on which you also rely for your paycheck).
Understand how selling shares will impact your taxes, even or especially if the share price drops.
Invest what you can comfortably afford.
bsammon
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by bsammon »

If they're worried about the stock price falling, they could employ some sort of hedging strategy, right? Buy the stock at a discount, and then short-sell the same (or lesser) amount, or buy some put options with a strike price at/near the current stock price.

I've never done this sort of thing, and it's a somewhat advanced maneuver, so this idea should come with a "Consult a trusted financial advisor, or do a lot of reading first" proviso.

Anyone done this sort of thing, and/or got pointers to articles about it? This idea would also apply to stock-option plans, I'd think.
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by inbox788 »

bsammon wrote: Thu Oct 29, 2020 3:02 pm If they're worried about the stock price falling, they could employ some sort of hedging strategy, right? Buy the stock at a discount, and then short-sell the same (or lesser) amount, or buy some put options with a strike price at/near the current stock price.

I've never done this sort of thing, and it's a somewhat advanced maneuver, so this idea should come with a "Consult a trusted financial advisor, or do a lot of reading first" proviso.

Anyone done this sort of thing, and/or got pointers to articles about it? This idea would also apply to stock-option plans, I'd think.
You could try, but be sure to look into the company rules about hedging against your company stock. For the most part, it's not worth doing, and just have enough risk taking room to speculate a little on your own company. Just don't put in more than you can risk. Maxing out 25k implies 166k+ salary and you should be saving and invest a good fraction of that.
alex_686 wrote: Thu Oct 29, 2020 2:55 pmThat is not volatility. Besides, you want forward looking volatility, not backwards. I am going to use AAPl as a example. You should be able to see that "at the money" options where the expiration date is greater than 3 months options are priced around 40%.
Volatily isn't the biggest worry, it's not spreading your bets across enough time to even things out. With the vast majority of SP500 type stocks over multiple years, the odd of not being even is pretty low (not that you can't get very unlucky), and volatility cuts both ways, so you could get something like AAPL or AMZN and beat the market. To get the 15% discount, you don't even have to beat the market, just thread water, but there's a fair chance the average stock has of meeting or beating the market. Above water in 3 or 5 years is quite likely.
Last edited by inbox788 on Thu Oct 29, 2020 3:12 pm, edited 1 time in total.
davemanjam
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by davemanjam »

willyd123 wrote: Thu Oct 29, 2020 2:01 pm I see davemanjam has replied that plenty of companies go bankrupt. I had no idea! If this is your concern, you should put all your money in a safe. :happy
Ok, right, but sometimes people need to be reminded of that fact...that is the risk in owning individual stock.
I'm not saying to put money in a safe, investing in an individual stock is not the same as investing in the SP500.
If they were giving you 15% discount on an SP500 fund, everyone on this forum would be all-in.
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ClevrChico
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by ClevrChico »

If you have a solid company, it seems like a no brainer. If you have a good plan, it's getting the equivalent of a nice raise for enrolling and a bit of extra tax work.

Some plans can have the purchase of the stock to actually be lower/higher than the current market price. (It depends on how your plan determines the purchase price and how the stock is performing during the offering period. This can be good or bad.)

Be sure to read the fine details. I believe one has to hold the stock for two years from the start of the offering period to be considered a qualified disposition and be taxed capital gains rates vs. ordinary income rates. (Varies by type of plan.)
Beehave
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by Beehave »

I've participated as have other family members at various corporations. The 15% discount is a winner unless you think your company is heading for the rocks, in which case risking three-fourths of a year's worth of purchases made at discount some time in the future is not a show-stopper in-itself and not the major problem.

So my advice is to buy the ESPP offering and just don't accumulate the stock year-after-year-after year and don't put in the full 15% if it will crimp your lifestyle or other regular savings such as getting at least corporate match for your 401k contributions if available. Sell periodically and use the funds to help pay for large expenses such as vehicle purchase, children's tuition, pay-down of mortgage, etc. The 15% discount for a megacorp's stock is usually compelling and a good deal over time and an additional vehicle for savings that disappear from your paycheck and therefore money that you do not spend.
bsammon
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by bsammon »

inbox788 wrote: Thu Oct 29, 2020 3:10 pm You could try, but be sure to look into the company rules about hedging against your company stock. For the most part, it's not worth doing,
Huh. I've never been in this situation (having ESPP available to me), so I had no idea. How does this sort of "company rules" thing generally apply? Is it some sort of contractual obligation imposed on employees? Or just a "our employee plan doesn't have that functionality" situation, where executing the short-sell or option trade through a separate brokerage account (with a different brokerage) is a possibility?
alex_686
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by alex_686 »

bsammon wrote: Thu Oct 29, 2020 3:36 pm
inbox788 wrote: Thu Oct 29, 2020 3:10 pm You could try, but be sure to look into the company rules about hedging against your company stock. For the most part, it's not worth doing,
Huh. I've never been in this situation (having ESPP available to me), so I had no idea. How does this sort of "company rules" thing generally apply? Is it some sort of contractual obligation imposed on employees? Or just a "our employee plan doesn't have that functionality" situation, where executing the short-sell or option trade through a separate brokerage account (with a different brokerage) is a possibility?
This tends to affect only upper management. The idea is that they should have some skin in the game. If they have a large amount - say +$1m - tied to the company they should be a bit more focused. This can be part of a "golden handcuff" scheme. So the company is spending big bucks on the employee to tie their fate to the company, ensuring a high level of focus. What they don't want you to do is to turn around and hedge that risk away, defeating the purpose of throwing money at you.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
evancox10
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by evancox10 »

bsammon wrote: Thu Oct 29, 2020 3:36 pm
inbox788 wrote: Thu Oct 29, 2020 3:10 pm You could try, but be sure to look into the company rules about hedging against your company stock. For the most part, it's not worth doing,
Huh. I've never been in this situation (having ESPP available to me), so I had no idea. How does this sort of "company rules" thing generally apply? Is it some sort of contractual obligation imposed on employees? Or just a "our employee plan doesn't have that functionality" situation, where executing the short-sell or option trade through a separate brokerage account (with a different brokerage) is a possibility?
For my megacorp employer, it is just part of the employment agreement, specifically the insider trading policy. It explicitly bans short selling and hedging.

Also, my current employer and previous employer both have/had an ESPP with 15% discount on the lower of the beginning /ending price, with no holding period after the purchase. This works out to a 90% IRR, and that’s if the stock is flat or down. I, and most other employees I think, always participated to the maximum extent possible. This is a harder decision with the 1 year holding period, but I would probably still do it so long as the amount tied up represented an overall small part of my portfolio. Also not sure if yours uses the minimum of the starting and ending prices. If not I would definitely avoid it.

Edit: I am definitely not upper management. The no short selling agreement presumably applies to everyone, from the CEO on down.
inbox788
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by inbox788 »

alex_686 wrote: Thu Oct 29, 2020 3:44 pm
bsammon wrote: Thu Oct 29, 2020 3:36 pm
inbox788 wrote: Thu Oct 29, 2020 3:10 pm You could try, but be sure to look into the company rules about hedging against your company stock. For the most part, it's not worth doing,
Huh. I've never been in this situation (having ESPP available to me), so I had no idea. How does this sort of "company rules" thing generally apply? Is it some sort of contractual obligation imposed on employees? Or just a "our employee plan doesn't have that functionality" situation, where executing the short-sell or option trade through a separate brokerage account (with a different brokerage) is a possibility?
This tends to affect only upper management. The idea is that they should have some skin in the game. If they have a large amount - say +$1m - tied to the company they should be a bit more focused. This can be part of a "golden handcuff" scheme. So the company is spending big bucks on the employee to tie their fate to the company, ensuring a high level of focus. What they don't want you to do is to turn around and hedge that risk away, defeating the purpose of throwing money at you.
Policies vary, some may not be legal or unenforceable like some non-compete requirements. But, like violating any company policy, you may risk reprimand or firing. There are company policy restrictions that may limit legal activity. It's very company specific. Sometimes they only apply to very high management, other times to anyone in the company that may be in contact with "insider information", and some just to any employee. Look up their definition of "insider".
Other Prohibited Transactions. GM considers it inappropriate for Insidersto engage in speculative
transactions in GM Securities or in certain other transactions in GM Securities that may lead to
inadvertent violations of insider trading laws or that create a conflict of interest for the Insider.
Therefore, Insiders may not engage in any of the following transactions with respect to GM
Securities:
(i) short sales;
(ii) buying or selling GM options (other than options granted pursuant to GM’s long-term
incentive plans), including puts or calls;
(iii) holding GM Securities in margin accounts and/or pledging GM Securities as collateral;
(iv) hedging transactions (including with respect to any SEC Rule10b5-1 Trading Plan); and
(v) placing standing orders with a broker to buy or sell GM Securities that have a duration in
excess of three business days (other than when such orders are made pursuant to a SEC
Rule 10b5-1 Trading Plan).
In addition, from time to time, GM may determine that other types of transactions by Insiders in
GM Securities shall be prohibited or shall be permitted only with the prior written consent of
Securities Practice Team.
https://generalmotorscompany.gcs-web.co ... d8c3e22e78
viewtopic.php?t=128914

If you find you're in violation, you should stop immediately. Whether you decide to notify the company and deal with the HR/IR documentation or ignore it (and for very minor transgressions) they will never be known, is up to you. It might depend on company culture, but I'm guessing most companies won't make a big deal out of a few ESPP shares being hedged. A bigger deal might be made from parking in a reserved spot.

Anyway, between all the legal stuff, figuring out hedging and costs and trouble executing a plan, it's more complicated than just taking the market and individual stock risk, and letting the chips fall. And for the most part, hedging is like insurance protecting from the worst outcome, but hurting the best and at a cost.
masrepus
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by masrepus »

All four of the companies I worked for with ESPP all had the same restrictions on not being allowed to short sale or put options. A big no-no.

For me ESPP is a great short-term savings with little risk. Buy at 15% below market price. You pay in over 6 months and sell immediately to get your money. Sure it is short term gains but that is a nice problem to have. Just have to be able to save over the 6 months. I would max it out as much as I could.

As others have mentioned, though, your program is a 1 year hold, so you are really out that cash for longer and the risk of dropping increases. Three of the companies I worked at had no hold so that worked out great. The last one has a 6 month hold, and it makes me pause, but I still do it. If not, I would have invested in sp500 and held anyways. Stock also has a nice dividend so I make even more.
dcabler
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by dcabler »

There have been several of these ESPP threads where the OP has reported that there is a holding period before you can sell. I wonder if that's a trend because I've participated in multiple ESPP programs over the years and never had that requirement. Or maybe I've just been lucky.

In all but one case, it was a 15% discount based on the lower of the stock price on the 1st day or last day of the quarter. In most companies, the shares appeared in my E-trade account on the very next day, but at some companies it could take up to 5 days to appear. Regardless, my policy for both ESPP and RSU's has been to sell on immediately and to take all proceeds and deposit them into my taxable brokerage account where I own broad based ETFs/Mutual index funds. In one company, it was based on a 6 month period (15% discount based on the lower of the price at beginning or end of the 6 month period). But it had a twist. If after the new 6 month period the price was calculated and it turned out to be higher than the previous 6 month period, then the price from the previous 6 month period applied. Could be some significant $$ if your company's stock was on a roll!

Reasons I do what I do.
- Long ago I moved away from owning individual stocks to owning only index-based ETFs/Mutual Funds
- The return associated with a 15% discount (at a minimum) is significant. If you're lucky enough that the price was set based on the price at the beginning of the quarter and your stock has risen over the course of the quarter, it's even better! The only risk is if the price was set based on the price at the end of the quarter, then it may move some by opening the next morning if they're able to deposit shares that quickly. Otherwise, like some of my plans, it may take several days. And even for those plans, I've never even come close to wiping out the 15% discount.
- I have enough risk with my paycheck coming from my employer, why add more risk?

I personally would not participate in an ESPP program with a holding period as there would be too much risk of being under water and either being forced to sell at a loss or to hold onto it even longer than I wanted to.
backpacker61
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by backpacker61 »

JD2775 wrote: Thu Oct 29, 2020 2:54 pm ahhh, maybe Ive been looking at this incorrectly. From a google search...

ESPPs typically have either a 12- or 18-month offering period comprised of two or three six-month purchase periods. Once you enroll, your payroll contributions accrue until your employer uses the accumulated funds to purchase company shares on your behalf on the last day of each purchase period

So it sounds like I am not actually purchasing stock every single pay period, but it is accruing until the end of the purchase period and then I receive the shares all at once?

If so, that makes much more sense to me, and I can see how easy it would be to manage the selling at the 1-year mark.
Yes, that's how they typically work; your contributions acrue to the end of the purchase period at which point the shares are purchased and you receive all the shares.

If you are already maxing your 401K to the IRS limit, I would participate, at least to some extent.
You don't have to do the full 15%, of course.

I've participated in ESPP's since about 1986. Some worked out better than others, but on balance, I've been grateful to have them.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
inbox788
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by inbox788 »

dcabler wrote: Fri Oct 30, 2020 5:26 am- The return associated with a 15% discount (at a minimum) is significant. If you're lucky enough that the price was set based on the price at the beginning of the quarter and your stock has risen over the course of the quarter, it's even better! The only risk is if the price was set based on the price at the end of the quarter, then it may move some by opening the next morning if they're able to deposit shares that quickly. Otherwise, like some of my plans, it may take several days. And even for those plans, I've never even come close to wiping out the 15% discount.
- I have enough risk with my paycheck coming from my employer, why add more risk?

I personally would not participate in an ESPP program with a holding period as there would be too much risk of being under water and either being forced to sell at a loss or to hold onto it even longer than I wanted to.
Holding periods are a risk. Combining source of paycheck and stock from same company is a concentration risk. Enron, Lehman Brothers, and countless other bankruptcies do happen. On the other hand, they're not that frequent. The 15% discount is substantial enough for some and any additional discount is a bonus.

If you're stressing over a few days risk selling some shares, then this is not for you if you're require to hold it 6 months or a year. If you're not planning to stay for more than 1 or 2 years, then time isn't on your side.
backpacker61 wrote: Fri Oct 30, 2020 6:25 amIf you are already maxing your 401K to the IRS limit, I would participate, at least to some extent.
You don't have to do the full 15%, of course.
in for a penny, in for a pound

If it's not worth doing or the benefits are small or the risks too high, don't do it. But if it's worth doing, it's usually worth maxing out. I'd even consider borrowing the first year or two and paying low interest to get the ball rolling. Ideally, from a bank, but I don't know any that would do it and personal loans usually carry high interest. Indirectly, you can use mortgage or car loan (not may extra payments if you're inclined). Loans from relatives are frowned upon here, but if you have access (and don't mind all the non-financial issues), why not (new college graduate asking well off parents)? Borrowing from yourself (re-prioritizing investment order) is probably not worth it. Opportunity cost will eat away most or all of any potential benefits.

Younger employees have higher risk tolerance while older employees have higher investments so amount of single stock is smaller percentage of portfolio. Just know your risk limits, not just plan limits.
dcabler
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by dcabler »

inbox788 wrote: Fri Oct 30, 2020 11:49 am
dcabler wrote: Fri Oct 30, 2020 5:26 am- The return associated with a 15% discount (at a minimum) is significant. If you're lucky enough that the price was set based on the price at the beginning of the quarter and your stock has risen over the course of the quarter, it's even better! The only risk is if the price was set based on the price at the end of the quarter, then it may move some by opening the next morning if they're able to deposit shares that quickly. Otherwise, like some of my plans, it may take several days. And even for those plans, I've never even come close to wiping out the 15% discount.
- I have enough risk with my paycheck coming from my employer, why add more risk?

I personally would not participate in an ESPP program with a holding period as there would be too much risk of being under water and either being forced to sell at a loss or to hold onto it even longer than I wanted to.
Holding periods are a risk. Combining source of paycheck and stock from same company is a concentration risk. Enron, Lehman Brothers, and countless other bankruptcies do happen. On the other hand, they're not that frequent. The 15% discount is substantial enough for some and any additional discount is a bonus.

If you're stressing over a few days risk selling some shares, then this is not for you if you're require to hold it 6 months or a year. If you're not planning to stay for more than 1 or 2 years, then time isn't on your side.
backpacker61 wrote: Fri Oct 30, 2020 6:25 amIf you are already maxing your 401K to the IRS limit, I would participate, at least to some extent.
You don't have to do the full 15%, of course.
in for a penny, in for a pound

If it's not worth doing or the benefits are small or the risks too high, don't do it. But if it's worth doing, it's usually worth maxing out. I'd even consider borrowing the first year or two and paying low interest to get the ball rolling. Ideally, from a bank, but I don't know any that would do it and personal loans usually carry high interest. Indirectly, you can use mortgage or car loan (not may extra payments if you're inclined). Loans from relatives are frowned upon here, but if you have access (and don't mind all the non-financial issues), why not (new college graduate asking well off parents)? Borrowing from yourself (re-prioritizing investment order) is probably not worth it. Opportunity cost will eat away most or all of any potential benefits.

Younger employees have higher risk tolerance while older employees have higher investments so amount of single stock is smaller percentage of portfolio. Just know your risk limits, not just plan limits.
It doesn't take an Enron or Lehman brothers type of risk to lose your job. And oftentimes the reasons for layoffs in the first place are the same reasons that company stock is suffering. Never have stressed over it taking a few days to show up in my account, though I much prefer the companies that were able to make it show up immediately. I will continue to take the free money, though. :-)
Frank the Tank
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by Frank the Tank »

inbox788 wrote: Fri Oct 30, 2020 11:49 am
dcabler wrote: Fri Oct 30, 2020 5:26 am- The return associated with a 15% discount (at a minimum) is significant. If you're lucky enough that the price was set based on the price at the beginning of the quarter and your stock has risen over the course of the quarter, it's even better! The only risk is if the price was set based on the price at the end of the quarter, then it may move some by opening the next morning if they're able to deposit shares that quickly. Otherwise, like some of my plans, it may take several days. And even for those plans, I've never even come close to wiping out the 15% discount.
- I have enough risk with my paycheck coming from my employer, why add more risk?

I personally would not participate in an ESPP program with a holding period as there would be too much risk of being under water and either being forced to sell at a loss or to hold onto it even longer than I wanted to.
Holding periods are a risk. Combining source of paycheck and stock from same company is a concentration risk. Enron, Lehman Brothers, and countless other bankruptcies do happen. On the other hand, they're not that frequent. The 15% discount is substantial enough for some and any additional discount is a bonus.

If you're stressing over a few days risk selling some shares, then this is not for you if you're require to hold it 6 months or a year. If you're not planning to stay for more than 1 or 2 years, then time isn't on your side.
backpacker61 wrote: Fri Oct 30, 2020 6:25 amIf you are already maxing your 401K to the IRS limit, I would participate, at least to some extent.
You don't have to do the full 15%, of course.
in for a penny, in for a pound

If it's not worth doing or the benefits are small or the risks too high, don't do it. But if it's worth doing, it's usually worth maxing out. I'd even consider borrowing the first year or two and paying low interest to get the ball rolling. Ideally, from a bank, but I don't know any that would do it and personal loans usually carry high interest. Indirectly, you can use mortgage or car loan (not may extra payments if you're inclined). Loans from relatives are frowned upon here, but if you have access (and don't mind all the non-financial issues), why not (new college graduate asking well off parents)? Borrowing from yourself (re-prioritizing investment order) is probably not worth it. Opportunity cost will eat away most or all of any potential benefits.

Younger employees have higher risk tolerance while older employees have higher investments so amount of single stock is smaller percentage of portfolio. Just know your risk limits, not just plan limits.
I could understand being in for a penny from a career and office politics perspective. When it comes to looking for a raise and/or promotion, the reality is that a company may very well review whether an employee participated in an ESPP program and use it as a factor. Investing the minimum (as opposed to the maximum) could at least check that box.
AB609
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Re: What's the consensus on Employee Stock Purchase Plans?

Post by AB609 »

If you think the company stock price is likely to be stable and you are not having to short change retirement contributions or like to do it, I would participate.
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