Opportunity to invest in company stock

[mydogismyheart]

My company has decided that in lieu of offering us a 401K match, they are going to offer us the opportunity to invest in the company stock at a 15% discount.  It will work like this: Starting January 1st, I can open an etrades account and allocate a certain amount of my paycheck to go towards the stock.  It will take that money out of each paycheck and hold it into an account until June 30th.  On July 1st it will then take all that money and using the LOWEST stock price from the previous 6 months, will invest at a 15% discount.  So technically I get 2 discounts since it will purchase at whatever the lowest price was and the 15%.  It's a tech company that has been doing well for quite a few years and is continuing to grow. 

I'm just nervous because I've never been big on investing in individual stocks, I've always been a vanguard index fund person thanks to Mr Money Mustache and a few others.  I feel like this is a good opportunity because of the discounts, but don't know that for a fact since I'm new to investing.  What would you guys do?  Do you think it would be a good investment and if so, how much would you allocate towards it?  I will be debt free except my mortgage officially as of the end of the year, so I will have about an extra $1,000-1500/mo to invest between 401K, Vanguard and this.

[Joel]

How soon after can you sell it? If immediately, you could take the discounts and then cash out.

[mydogismyheart]

Due to insider trading policies there are only certain days that I can buy/sell during the year. I believe I also have to hold on to the stock for 6 months... i know there is a minimum on that but can't remember what it is.

[alexpkeaton]

I'd max it out, sell at the earliest opportunity. Basically set up a pipeline of purchase -> hold -> sell. Once it's running whatever money you put into the stock will be offset by what you sell and you'll just be enjoying a 15% return. Your annualized return will actually be more like 30% since it only takes half the year to realize the gain and repeat. It's a no-brainer.

[Sarah Saverdink]

I'd max it out, sell at the earliest opportunity. Basically set up a pipeline of purchase -> hold -> sell. Once it's running whatever money you put into the stock will be offset by what you sell and you'll just be enjoying a 15% return. Your annualized return will actually be more like 30% since it only takes half the year to realize the gain and repeat. It's a no-brainer.

Potentially a much greater than 15% immediate return since you will get the lowest purchase price over a 6 month period plus the 15% discount.

This is free money. Absolutely take advantage of it.

[koshtra]

Free money! Free money!

Yeah. Go for it. I'd turn it over pretty quick, though. Maybe keep each batch long enough so it counts as capital gains, if you're looking at a hefty tax hit.  But it's a great deal, either way.

[Mr. Boh]

Do it.

[starguru]

That sounds like an employee stock purchase plan.  Is it the lowest price on ANY day in the six month period or the first or last day?


Sent from my iPhone using Tapatalk

[ILikeDividends]

As others have said, you should absolutely max out the program, get your discounted securities, and sell them as soon as you are able.

What you should NOT DO, is hold the stock any longer than necessary.

No matter how good of an investment it might actually seem, tying your employment and your retirement together is never a good idea.  If the business turns down for your company, and layoffs (ahem, "rightsizing") become a necessity, you risk losing your income stream at a time the company's stock could very well be in a tailspin.  Been there.  Done that.

Taking your 15% discount, and converting it into another investment, as soon as you can, would be a more prudent bet than investing your own money in your employer's stock for a long time.

[alexpkeaton]

As others have said, you should absolutely max out the program, get your discounted securities, and sell them as soon as you are able.

What you should NOT DO, is hold the stock any longer than necessary.

Yeah, standard advice is don't worry about long-term vs. short-term gains. Take your money and run. You've made money, no need to get greedy.

But I'd say it's up to you. Consider how much of your net worth will be tied up in company stock and how confident you are in the company. You are an insider, so you might have a better view where things are going. But, make no mistake, by holding the stock you are stock picking. Nothing necessarily wrong with that, but it really only makes sense if you believe you know better than the market. Do you?

[mydogismyheart]

Thanks for the advice everyone, I really appreciate it. I read up  on it a bit more (since this is a new thing to me) and it says I can buy/sell at anytime there is an open trading window for me.  The dates that I'll be allowed to buy/sell will be pre determined and a calendar sent out.  I don't have to hold on to the stock for any particular period of time.  So as soon as a day opens up that I can sell then I most likely will ASAP.  Also, to answer one of the above questions, it is the lower price of either the first day or last day of the 6 month period, not any day.  So whichever price is lower that is the price it will be purchased at.

Thanks again!  I think I will follow this advice and see how it goes.  I may start with a slightly smaller amount then the max because the max is quite a bit more than what I can afford right now.  But if I follow this advice then I will most likely be able to start building that up a  bit as I cash out with a profit (hopefully) and can use some of the cashed out money to supplement the lower income for the future and the extra to reinvest into my Vanguard account.

[radram]

I would max out this program, even reducing any other saving streams if needed. This is especially true if there was a big bump in the 6 months prior to buying. 15% discount plus immediate 6 months of earnings sounds great to pass on. Can you decide the amount after you know how good the discount is? If so you could buy more/less based on how good thge deal is.

I would not "sell as soon as possible", unless the tax ramifications make it prudent.

I understand the concerns of buying stock in a company you work in (too many eggs in 1 basket). I consider the ability to sell worth that risk. I would also use my knowledge of the company to decide when, if ever to sell.

Keep us posted. I would be interested in how this program works for you years from now.

[ILikeDividends]

I would also use my knowledge of the company to decide when, if ever to sell.

Rank and file employees don't usually have any more access to "insider information" than anyone else on the street does.  Unless you work in the 'C' suite, you are unlikely to have an edge over any outsider.

And in my case, my company's stock (Sun Microsystems) tanked so far and so fast, that only in hindsight was it apparent that those who did work in the 'C' suite were completely blind-sided.  They had essentially 'bet the farm' on the dot-com bubble.  When it popped, 'poof,' went the large majority of their customers.

The company never recovered.  Death by rapid over-expansion to serve a highly concentrated market that simply vanished without warning.  Sun was eventually gobbled up by Oracle for not much more than cash on the books plus a token premium for intellectual property.

At one point my not-yet fully vested stock options were worth over a quarter million.  By the time they were fully vested, I was lucky to milk about 5K out of them before I was moved in an outsourcing deal to CSC; which would have invalidated my options if I hadn't exercised them. I consider myself fortunate that I never held any of the stock that I bought through the ESPP.

[mydogismyheart]

I would also use my knowledge of the company to decide when, if ever to sell.

Rank and file employees don't usually have any more access to "insider information" than anyone else on the street does.  Unless you work in the 'C' suite, you are unlikely to have an edge over any outsider.

And in my case, my company's stock (Sun Microsystems) tanked so far and so fast, that only in hindsight was it apparent that those who did work in the 'C' suite were completely blind-sided.  They had essentially 'bet the farm' on the dot-com bubble.  When it popped, 'poof,' went the large majority of their customers.

The company never recovered.  Death by rapid over-expansion to serve a highly concentrated market that simply vanished without warning.  Sun was eventually gobbled up by Oracle for not much more than cash on the books plus a token premium for intellectual property.

At one point my not-yet fully vested stock options were worth over a quarter million.  By the time they were fully vested, I was lucky to milk about 5K out of them before I was moved in an outsourcing deal to CSC; which would have invalidated my options if I hadn't exercised them. I consider myself fortunate that I never held any of the stock that I bought through the ESPP.

Yeah, I'm unsure how fantastic it will be... the company has been around for about a decade but the stock is newer, we just went public last year. I don't have a ton of insider information other than what they ultimately end up releasing to the public (I may hear about it first at a company meeting but then it's released soon after, and that would most likely be a black out period anyway for me).

I can see some things such as growth and hiring, but it's too hard to really know. I'm up for a management position and if that happens then I might get word on some information earlier than others, but again, they'd probably incorporate a blackout period in which I couldn't sell anyway.  Since it's inception, the stock doubled in price but has been holding steady the last few months and hasn't done much. I read some articles and it's not really one that is recommended to buy right now.  Doesn't mean it wouldn't be a good investment for me since I get the discounted pricing.  Might be just fine but I probably wouldn't hold on too long unless I started seeing some better growth, and even then I might not unless it went crazy and I decided to see what happens for a few weeks or something.  That thought makes me more nervous because if it did start to go down I wouldn't necessarily be able to sell right away.

I have to commit by Dec 22nd and can't make many changes after that.  There is a ONE time only option where I can reduce the amount or opt out completely, but I can't increase.

With all that said, I do really love my company and really enjoy what I do and the people I work with. Probably the best place I've ever worked and I hope I get to stay for a long time.  However, that doesn't guarantee fantastic stock. :)

[koshtra]

Yeah, the thing about most tech companies is that the usual business model is "bet the farm on one product really taking off," and even if it does they may fumble the actual making money part of it.

[ILikeDividends]

Yeah, the thing about most tech companies is that the usual business model is "bet the farm on one product really taking off," and even if it does they may fumble the actual making money part of it.

Warren Buffet said, "Only when the tide goes out do you discover who's been swimming naked."

Sun was an established public company, and was considered a thought-leader in the tech space at the time. Sun made cubic tons of money, hand over fist, while the tech-bubble was inflating.  The stock split 5 or 6 times in the span of just a few years.  It was a wild ride that seemed like it could never end; that is, until it abruptly ended. 

While Sun definitely wasn't swimming naked, what the executives overlooked was that they allowed the massive majority of their core customer base to be comprised of those who actually were swimming naked.

Sun had government, and defense contracts, customers in the education space.  But when the tide rolled out, what had rapidly become Sun's largest customer base literally collapsed in just a few short quarters, and with no other market growing large enough or fast enough to replace them.  They became too dependent for revenue from the waves of tech IPOs that should never have gone public, who were using their own stock to capitalize their unprofitable businesses, who would never survive, and who would never be replaced after the tech-wreck.

Sun limped along, struggling for another ten years after that; bleeding cash all along the way.  They were still doing business within their other market verticals, but they could never replace the obscenely massive flows of revenue they lost when the dot-com bubble burst.

I guess the take-away lesson is that even if you do have insider information, it still won't do you any good if the once-valid premise that information is based on evaporates into thin air for reasons outside of anyone's control.

[radram]

I would also use my knowledge of the company to decide when, if ever to sell.

Rank and file employees don't usually have any more access to "insider information" than anyone else on the street does.  Unless you work in the 'C' suite, you are unlikely to have an edge over any outsider.

And in my case, my company's stock (Sun Microsystems) tanked so far and so fast, that only in hindsight was it apparent that those who did work in the 'C' suite were completely blind-sided.  They had essentially 'bet the farm' on the dot-com bubble.  When it popped, 'poof,' went the large majority of their customers.

The company never recovered.  Death by rapid over-expansion to serve a highly concentrated market that simply vanished without warning.  Sun was eventually gobbled up by Oracle for not much more than cash on the books plus a token premium for intellectual property.

At one point my not-yet fully vested stock options were worth over a quarter million.  By the time they were fully vested, I was lucky to milk about 5K out of them before I was moved in an outsourcing deal to CSC; which would have invalidated my options if I hadn't exercised them. I consider myself fortunate that I never held any of the stock that I bought through the ESPP.

Insider information...no. Not even legal to act on that. I was not clear, but that is not at all what I am talking about. I am talking about the very things you are discussing here. You could not act, since you were not vested. OP stated a much different situation.

When you are losing clients in droves, everyone in the office knows it as it is happening, unless you choose not to accept what you are seeing. I was at 2 companies that were dogs. I could see a mile away what was happening, and left before any of it got on me. The OP is posting that he/she has a firm grasp of the company. If the tide were to change, of course stop buying the stock, but no doubt I would take full advantage of the buy ability described.

This new information about possible blackout dates has me a little concerned. The fact that you can decrease, but not increase the amount tells me even more that I would go for the max if I could swing it.

[MrSpendy]

do the terms of the program allow you to hedge?

does your company's stock have an active/liquid options market?

If the answers to the above are "yes" and "yes", I would max out this program and just roll puts at a max loss that you'd be comfortable with, rather than systematically selling.

[jc4]

My wife's company has the same program. However, we're not selling at first opportunity. We'll hold 1 year. That drops the taxes from income (25%) to capital gains (15%).

[Semag]

I believe this is radically common - I've seen it at several companies.

The general best math is "Sell the minute you get the stock."

Yes there are tax ramifications, but in a small cap stock there is a huge chance that your 15% discount can be eaten up by the time your 1 year capital gain is up.

If you really want to maximize this program, you max it out to the full 15% of your income. This is what I tell the employees in my group as well. Two things happen:

1)  You maximize the gain on the 15% discount which is what your goal is. Holding any longer carries risk, and at that point you are stock picking
2)  You "learn to live with less."

Today is one of my  favorite days of the year. My ESPP goes live tonight, and I will sell every single share tomorrow with the opening bell. My finances have adjusted to accomodate my lower paycheck, so at this point this is a huge influx of cash that can go directly into savings. 

If you can learn to live with the savings and you save 15% of your after tax money in your ESPP + 15% in your 401K - you're already at a 30% savings rate. Based on MMM's guide that puts you at 30 years to retirement - assuming no changes in salary, etc. This would be "retired by 50" - and that doesn't include ANY OTHER SAVING.

[triangle]

Yes Do it!...meaning buy at a discount.

When to sell it is dependent on companies financial position relative to the market and fundamental valuation.

[Mighty-Dollar]

My company has decided that in lieu of offering us a 401K match, they are going to offer us the opportunity to invest in the company stock at a 15% discount.

You work there AND you're considering investing in it too? You'd be putting too many eggs in that one company basket. Pick an index fund instead.