I just recently found out about ESPPs and might be able to participate through my company. Do any of your currently utilize this as a wealth building strategy or have more information about the potential benefits and pitfalls?
Here are some principles I followed and some lessons I learnt:
+ I usually got ESPP shares at 15% discount. Note that of the 15% ESPP gains, some of it goes away in taxes. So, depending on your tax bracket, you will not get 15%.
+ I would sell it right away OR keep it based on a couple factors. If the stock prices hovers around $5, then even small negative changes in stock price can wipe out most of 15% ESPP gains. If the stock price hovers around $50, then I would not sell it right away....hoping for either capital appreciation OR to reach 1 year of hold time to realize long term capital gains only.
+ I got greedy and did not sell any of the ESPP shares for almost 3 years....and then I realized that 10% of my portfolio was in one company i.e. high risk especially when the company started showing lots of negative signs. So, keep a cap on what percentage of your total portfolio the ESPP shares will occupy. I slowly started selling ESPP shares and diversifying into mutual funds....I got the same amount of dividends but from 48 companies instead of 1...my risk was diversified big time!
+ Realizing money after the sale of ESPP shares takes more time than sale of ordinary sale shares....something to do with getting approval from parent company, etc. Sometimes, it has taken me a week also to get the money in my account. So, be careful about committing the funds to something else too soon....I have been bitten by this one.
+ When the ESPP shares go down X%, one of the options is to sell it at a loss and use it for Tax Loss Harvesting. Please decide what the value of X% is and sell it. If you really like the company, you can buy it back at a later time.
Hope that helps.