Company Stock Purchase Question

[Mike2]

My company offers a stock purchase plan where the money is automatically deducted from our paychecks and then stock is purchased once a quarter at 15% off of the market price that day.  I did this for awhile but stopped because I had too much of that stock compared to other investments.  My question is should I start again and sell it soon after to net the 15%?  Is there a downside besides paying some taxes on the gain?  This is separate from my 401k so that isn't a consideration.

[MountainBeard]

You've got a guaranteed 15% return, why wouldn't you? 

Depending on your portfolio allocation, tax rate, and how you feel the company is going to do, it might be worth looking to sell shares a year out to have earnings post as long term cap gains though.

[Financial.Velociraptor]

My old employer had a similar program.  Lots of people maxed it out and called to sell their shares the same day it hit their account.  There were tax consequences but you still came out 15% * [marginal tax rate] ahead.

[Spork]

I've done it and sold a year later to avoid short term gains.  In my case there was some fortunate (lucky) market timing that went on as well.  Stock tanked during the buy and bounced at about the sale time.  That wasn't my plan, but I cannot complain about it.

[MDM]

My company offers a stock purchase plan where the money is automatically deducted from our paychecks and then stock is purchased once a quarter at 15% off of the market price that day.  I did this for awhile but stopped because I had too much of that stock compared to other investments.  My question is should I start again and sell it soon after to net the 15%?  Is there a downside besides paying some taxes on the gain?  This is separate from my 401k so that isn't a consideration.

Buy it, then sell it and reinvest in a more diversified way.  "When" to sell it depends on the type of plan.  For some plans the timing doesn't matter, for others it does.  Check the details and proceed accordingly.

[neil]

As others have said, ESPP is part of your compensation and you are leaving money on the table if there aren't any sort of restrictions to sell immediately.  You should go in with the assumption that it is at worst a small bump in your salary that you would expect to pay ordinary tax rates on had it been a bonus or something.

It is necessary to hold 2 years from the grant date to reduce the tax bill and company risk is far greater than what a 15% discount provides.  Consider the difference in tax bill between selling immediately and selling in the future.  The volatility of basically any company is going to be more than the taxes you are trying to avoid.  I would generally recommend if someone was following an indexed approach, they should always sell company stock and move it into their taxable account.  Once you decide to hold, it is now a part of your portfolio and you need to make unbiased decisions regarding your investment.

[Mr Fixit]

You could set up a cycle so you buy shares and sell them after a year so you pay long term capital gains tax rates instead of your marginal rate.  The downside would be you have risk of the stock going down during that time.  You could always set a stop loss to prevent losing money.

[MDM]

It is necessary to hold 2 years from the grant date to reduce the tax bill

That may be true - many ESPPs do have that feature, but not all.  See http://forum.mrmoneymustache.com/investor-alley/employer-stock-options/ for more details.

[Dodge]

The 15% discount is a big deal. It turns out to be a 90% annualized return or higher.

How so? Suppose the stock was $22 at the beginning of the purchase period and it went down to $20 at the end of the period 6 months later. Here’s what happens:

Because the stock went down, your purchase price will be 15% discount to the price at the end of the purchase period, which is $20 * 85% = $17/share.  Suppose you contributed $255 per paycheck twice a month. Over a 6-month period you contributed $255 * 12 = $3,060.  You will receive $3,060 / $17 = 180 shares. You sell 180 shares at $20/share and receive $20 * 180 = $3,600, earning a profit of $3,600 – $3,060 = $540.

Percentage-wise your return is $540 / $3,060 = 17.65%. But, because your $3,060 was contributed over a 6-month period, the first contribution was tied up for 6 months, and the last contribution was tied up for only a few days. On average your money is only tied up for 3 months. So, earning 17.65% risk free for tying up your money for 3 months is equivalent to earning (1 + 17.65%) ^ 4 – 1 = 91.6% a year.

90%+ a year return is fantastic, isn’t it? That’s when the employer’s stock went down. Had the stock gone up from $20 at the beginning of the purchase period to $22 at the end, your return will be even higher at 180%!

Shamelessly copied from: http://thefinancebuff.com/employee-stock-purchase-plan-espp-is.html

Long story short?  Max out your ESPP and sell the stock immediately.  It's by far the best guaranteed (as long as you can sell immediately) investment return available.

[Mike2]

I checked the fine print today and there is no waiting period before I can sell the stock so I signed back up today and it will start on April 1st.  I also have some stock from when I was previously purchasing it so I am looking at selling some of it to move to an index fund.

[rocketman48097]

Do the math, buying at a 15% discount, and selling immediately, is a near 17% return.  I would put in the max allowed, 25k, if my company offered such a plan.  However, pre tax rules the day, so put money in your 401k first, at least 6% and if you are in the 25% tax bracket, then put in more.

I would suggest selling right away, or perhaps waiting a year to take advantage of lower capital gains rates.  Some years you might lose, but overall, the bias for most stocks in stable companies, is to go up.