Employee Stock Purchase Program - Should I do it?

[Tyson]

The company I work for offers employees the ability to purchase company stock at a 5% discount, and the new enrollment period is coming up.  My question is - should I enroll and if so, should I "max it out", or should I just focus my after-tax dollars on Vanguard index funds?

[TrMama]

Is there a hold period or can you sell it right away?

Regardless, just make sure you don't end up with a significant portion of your 'stache in Oracle stock.

[seattlecyclone]

This doesn't sound as good as some ESPPs (that offer 15% off the lower of the current price or the price six months ago), but if you can sell right away it's probably still worth it. It's an instant 5% return on investment, and you can then reinvest that money in index funds according to your chosen asset allocation.

[BrendanJ45]

5% is poor by industry standards, but SPP is usually a slam dunk. A few important questions:

Does it take the lower price between the start and the end of the period?
Can you sell it immediately after you get it?

If the answer to these two questions are yes you are getting about a 21% semi-guaranteed return on your money (1/.95 -1)*4, assuming it's the standard 6 month window (money is held for an average of 3 months).
The only reason it's semi-guaranteed is because there is usually a few days in between when the stock is purchased and when it posts to your account so you can sell it.
For a large company like Oracle I would max out your contribution if you can afford it and sell the stock quickly after receiving it.

[Tyson]

It looks like there's no wait period before needing to sell, I'm double checking with HR to make sure that's the case.

You can invest up to 10% of gross pay, it's deducted every paycheck and the purchase is made every 6 months.  Price is based on what it closes at on the last day of that 6 month period.

[forummm]

So if you can get a 5% return on 10% of your pay, it's like an expected 0.5% of your pay bonus, minus the transaction costs. So if you make $100k you could get another $500 minus transaction costs by just churning the stock. I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

[grantmeaname]

I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

That's an interesting conjecture. Here is the last year's price history and the plan document suggests that 4/1 and 10/1 are the relevant dates (or maybe the day before). Oddly, there doesn't seem to be a big effect on either volume or price. Perhaps arbitrageurs have traded the effect away, or perhaps the ESPP sucks so bad that it's not quantitatively significant compared to ordinary trading volumes.

[Tyson]

So if you can get a 5% return on 10% of your pay, it's like an expected 0.5% of your pay bonus, minus the transaction costs. So if you make $100k you could get another $500 minus transaction costs by just churning the stock. I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

The only downside is see is that they dock your pay and hold it for 6 months.  10% of my pay is $12k, so that's $1k per month that is being "held" for 6 months with zero growth while waiting for the purchase period.  Seems like it might be better to take that $1k per month and just dump it into a Vanguard, no? 

Sorry if I'm asking dumb questions, I'm very recently out of debt and the whole investing side of things is still a steep curve for me.

[mrpercentage]

Yes. Later exchange it a fair value. Easy 5% if you have patience

[forummm]

So if you can get a 5% return on 10% of your pay, it's like an expected 0.5% of your pay bonus, minus the transaction costs. So if you make $100k you could get another $500 minus transaction costs by just churning the stock. I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

The only downside is see is that they dock your pay and hold it for 6 months.  10% of my pay is $12k, so that's $1k per month that is being "held" for 6 months with zero growth while waiting for the purchase period.  Seems like it might be better to take that $1k per month and just dump it into a Vanguard, no? 

Sorry if I'm asking dumb questions, I'm very recently out of debt and the whole investing side of things is still a steep curve for me.

Yes, if they are docking 10% of your pay for 6 months, that's an interest free loan to them. The whole thing seems like a lot of hassle for a 0.2% minus transaction fees minus forgone interest raise.

[JumpInTheFIRE]

So if you can get a 5% return on 10% of your pay, it's like an expected 0.5% of your pay bonus, minus the transaction costs. So if you make $100k you could get another $500 minus transaction costs by just churning the stock. I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

The only downside is see is that they dock your pay and hold it for 6 months.  10% of my pay is $12k, so that's $1k per month that is being "held" for 6 months with zero growth while waiting for the purchase period.  Seems like it might be better to take that $1k per month and just dump it into a Vanguard, no? 

Sorry if I'm asking dumb questions, I'm very recently out of debt and the whole investing side of things is still a steep curve for me.

Yes, if they are docking 10% of your pay for 6 months, that's an interest free loan to them. The whole thing seems like a lot of hassle for a 0.2% minus transaction fees minus forgone interest raise.

It's really several small loans with an average duration of 3 months.  5% seems to be better than you could expect via an index fund (and certainly more than a 3-6 month CD) for that amount of time so I think the best course is to max it out.  My company has a similar program but it is a 15% premium on the price -- at that percentage it's a no-brainer, at 5% it is a little closer decision. 

[h2ogal]

Our ESPP discounts 15% and that is enough in my book to offset the downsides of the holding period between periodic purchases and offset the risk inherent in owning individual stock vs. index fund.

If my ESPP was only discounted by 5% that would not be enough to entice me to lock up my $ there as opposed to keeping it handy for other investments that are more aligned with my long term investment strategy.

[NewPerspective]

I have a question, why doesn't anyone mention capital gains taxes if you sell right away?  My husband participates in his DSPP but he generally holds for a year to avoid short term taxes.  (We are hit hard with taxes so we try to do whatever we can to minimize it).

Just curious why people don't tend to mention the tax implications of selling right away (and wondering if I'm missing something)?

[h2ogal]

Just curious why people don't tend to mention the tax implications of selling right away (and wondering if I'm missing something)?

Excellent point.  This is another down-side of the ESPP - once the holding period is up, you may not want to hold a single stock long-term, but then you pay the capital gains tax. 

[seattlecyclone]

Yes, do factor the taxes into the equation, but do it with the awareness that you're generally better off earning an extra dollar even if that means you have to pay $1 * (your marginal tax rate) in additional taxes.

[NathanP]

I wouldn't do it for only 5%. The return is small enough that the hassle of selling the stock to get your money back, plus the tax-time annoyance would cancel out the benefit (for me).

I have a plan where we get a 15% discount on the lower of the stock price at the start or end of the 6 month period. There is no minimum hold time. In this case I figure a minimum of a 60% return (15% over 3 months average) minus taxes and a $25 transaction fee. If the stock price has gone up over the 6 month period I can do even better.

Typically I take the proceeds from liquidating the ESPP and put it into IRAs for my wife and I. It is a painless way to fund them without having to setup automatic contributions through my brokerage.

Another thing to consider is that your company may offer the option to cancel the withholdings and get your money back in a "reasonable" amount of time. Perhaps this could partially offset an emergency fund?

[MayDay]

I wouldn't do it for 5% off the price on the last day. 

We get some percent off whatever is lower:  the price on the first or last day.  So you are more guaranteed to get a good price.  And you can also pull your money out and forgo the purchase up to about a week before the end of the period, if the stock price is doing something weird.  I believe we get either 10 or 15% off, whatever it was we decided it was worth it.

We do sell almost* immediately.  We just don't want further exposure to the company that provides 100% of our household income.  So we pay a higher tax rate on the profit, but we still make plenty of profit.  Over time as investments grow and HHI is a smaller chunk of our net worth, we may try to hold it for longer.

*Almost because there is a clear seasonal pattern to the stock, for the past 5-10 years at least, so we "time the market" by saving the December stock until spring to sell, so still not long enough to get the lower capital gains rate.  We sell the June stock immediately. 

[JetBlast]

How volatile is your company's stock?

My company also has just a 5% discount on the ESPP and I decided it wasn't worth it because our stock tends to move a couple percent a day as it is somewhat thinly traded. It takes a few days for the stock to be deposited in your account and I feel the chance of a 5% negative move in those few days is simply too high.

I'd rather take the cash and invest it in stock I hope to hold for decades.

[Tyson]

OK, I decided to not do it - just too finicky for such a small return.  Instead I opened a Vanguard account today and in the next month will set things up to transfer my savings directly into it every month.  Thanks all!

[Telecaster]

So if you can get a 5% return on 10% of your pay, it's like an expected 0.5% of your pay bonus, minus the transaction costs. So if you make $100k you could get another $500 minus transaction costs by just churning the stock. I would be curious to see if the stock price dips on these days when all the stock is issued to employees. First, because they are diluting the existing shareholders, and second because everyone is rushing to sell.

The only downside is see is that they dock your pay and hold it for 6 months.  10% of my pay is $12k, so that's $1k per month that is being "held" for 6 months with zero growth while waiting for the purchase period.  Seems like it might be better to take that $1k per month and just dump it into a Vanguard, no? 

Sorry if I'm asking dumb questions, I'm very recently out of debt and the whole investing side of things is still a steep curve for me.

I'm going to take the contrary side.  A 5% return every six months is awesome!!  That's 10% annualized, and virtually guaranteed, right?  You buy the stock and sell it right then for a locked in 5% gain.   As long as you can truly capture that 5% I would absolutely do this.  Even if you have to pay taxes at ordinary rates.