Investing 101 Should I Invest in My Employee Stock Purchase Plan? Read the Article Open Share Drawer Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)Click to share on Tumblr (Opens in new window)Click to share on Pinterest (Opens in new window)Click to share on LinkedIn (Opens in new window) Written by Mint.com Published Aug 20, 2013 4 min read Advertising Disclosure The views expressed on this blog are those of the bloggers, and not necessarily those of Intuit. Third-party blogger may have received compensation for their time and services. Click here to read full disclosure on third-party bloggers. This blog does not provide legal, financial, accounting or tax advice. The content on this blog is "as is" and carries no warranties. Intuit does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. After 20 days, comments are closed on posts. Intuit may, but has no obligation to, monitor comments. Comments that include profanity or abusive language will not be posted. Click here to read full Terms of Service. Mint.com Facebook Fan Amber Asks: I’d like some advice on ESPP’s. The company I work for offers a 15% discount on our stock (which has averaged well). Are ESPP’s a smart investment? Are they something that should be used short term or long term? Mint.com personal finance expert, Matthew Amster-Burton says: An Employee Stock Purchase Plan (ESPP) is when your company puts on a trenchcoat and says, “Psst! Employees, I’ve got a special deal for you: Company stock at up to 15% off.” ESPPs are complicated. If your company offers one, you can’t just walk up to a window and hand over $850 in exchange for $1000 worth of stock. You have to sign up for payroll deduction during an “offering period” (usually six months), and the accumulated money is used to buy stock at the end of the period. There are also tax issues that I really don’t want to get into. And, naturally, there are purchase limits. Most companies cap your ESPP purchase at 15% of your salary, and the IRS cuts you off at $25,000. If you want to see what an actual ESPP looks like, here’s the one offered by the Gap. (Full disclosure: I just bought some pants there.) We could talk about the gory details of ESPPs all day, but the question wasn’t “tell me all about ESPPs.” The question was whether Amber should participate in her company’s ESPP (she doesn’t work for the Gap, by the way). Know when to hold ’em Smart investors avoid owning their employer’s stock. Why? It’s not because they hate their boss. “I recommend never owning the stock of one’s employers, since the paycheck is already dependent on the company’s future,” says Allan Roth, author of How a Second-Grader Beats Wall Street. If your company goes bust and you’re holding its stock, you’re doubly screwed: out of work and sitting on worthless stock, like Enron employees. Does this mean Roth is opposed to ESPPs? Not at all. A deal’s a deal. “Assuming theESPP allows a significant discount, I recommend taking it,” he says. But with a caveat: he recommends selling the stock as soon as possible. So here’s what I wanted to tell Amber: Sure, participate in the ESPP. Like a 401(k) match, it’s free money. As soon as the offering period is over and you buy the stock, however, sell it the same day. You make an instant 17.6% return (the opposite of a 15% discount), and the risk is nearly zero. (You pay income tax on the money you make, obviously.) Unfortunately, the real world doesn’t always play along with my financial schemes. Amber’s ESPP has an unusual provision: it requires her to hold onto the stock for 18 months after she buys it. A lot can go down in 18 months, and I do mean down. I looked at what happened to Amber’s company’s stock during the financial crisis. Like all stocks, it wasn’t pretty. If Amber had started participating in the ESPP in fall 2007, by the time she was eligible to sell her first shares, at the market low in spring 2009, she would have been an unhappy camper. A stock can drop far more than 15% in 18 months. The big picture So what’s Amber supposed to do? Except for the mandatory holding period, her ESPPis quite generous. Who doesn’t love a bargain? The key to analyzing any investment is to ask how it fits in with the investor’s overall portfolio and goals. You don’t buy the most reliable car on the market if you’re too tall to fit in the front seat. With that in mind, I asked Amber about her 401(k). It turns out she’s been contributing enough to get the employer match (good!) but nothing beyond that (bad!). If she commits 15% of her pay to the ESPP, two years from now she’ll have the majority of her savings in employer stock. That’s way too much risk. I took a look at Amber’s 401(k), and it’s terrific: she has access to ultra-cheap stock and bond index funds. I recommended that she save aggressively in the 401(k), using a diversified portfolio. She’ll receive an immediate tax break for contributing, and won’t end up sitting on a possibly rickety pile of employer stock. Still, Amber would like to give the ESPP a try, so she’s going to set aside 2% of her salary toward it. In a couple of years, she’ll reevaluate her situation and see if committing more money to the ESPP makes sense. If the amount of money sitting in employer stock amounts to a small percentage of her total savings, rather than most of it, I (and Allan Roth) feel comfortable with the risk, as long as she sells her shares as soon as the plan allows. “I was wary of putting all my eggs in one basket,” says Amber, “and you have given me a much more sound alternative.” Well, I do what I can. Now, who wants to buy some discounted pants? Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster. Previous Post Alternatives to Traditional Savings Accounts Next Post Why Traditional Advice About Rainy Day Funds is Wrong Written by Mint.com More from Mint.com Browse Related Articles Mint App News Intuit Credit Karma welcomes all Minters! Retirement 101 5 Things the SECURE 2.0 Act changes about retirement Home Buying 101 What Are Homeowners Association (HOA) Fees and What Do … Financial Planning What Are Tax Deductions and Credits? 20 Ways To Save on… Financial Planning What Is Income Tax and How Is It Calculated? Investing 101 The 15 Best Investments for 2023 Investing 101 How To Buy Stocks: A Beginner’s Guide Investing 101 What Is Real Estate Wholesaling? Life What Is A Brushing Scam? Financial Planning WTFinance: Annuities vs Life Insurance