What Does It Really Mean to Buy Company Stock?
When building your long-term wealth, it’s important to take advantage of every financial opportunity at your fingertips. From maximizing your retirement accounts, to working with an investment advisor, today’s prudent action will be tomorrow’s wealth.
If you are eligible for your company’s employee stock purchase plan (ESPP), it’s important to see what your company offers, so you don’t let a solid financial opportunity fall by the wayside. This guide will help shed some light on how stock plans work.
Pros of Owning Company Stock
Receiving company stock is a wonderful thing. It’s not often available at every company these days, where only 49% of S&P 500 companies and 38.5% of Russell 3000 companies offer them. Though slightly uncommon, there are a number of solid benefits you can enjoy that can help your retirement planning and overall wealth-building.
Stock Plan Discount Right Off-the-Bat
One of the first benefits of your ESPP is the discount. If your company offers a stock plan, they likely offer it to you at a discount, ranging from 5-15% percent. This means that the moment you receive your stock plan rewards, your holdings are immediately profitable for you. This is certainly not the case when making stock trades in your outside brokerage accounts.
Also company stock plans have periods of time when you can sell your stock, but there’s usually no waiting period. In many ways, your employee stock is nearly “free” money, where you can sell at a profit and quickly receive the proceeds.
Some company stock plans have a look-back provision, where you can buy shares at its price during the beginning of the offering period, and still receive your eligible discount.
Have Skin in the Game
Is your company growing? That’s great news! Acquiring shares of your company stock enables you to have more skin in the game and reap the benefits, beyond your salary. Working overtime, being proactive, volunteering for more projects, all make more sense when you know that you directly benefit from when your company stock increases.
As a shareholder, you have earned the added benefit of being able to vote on corporate decisions, and access to shareholder meetings. While your position or department may typically preclude you from voting on board decisions as an employee, you gain this access by being a shareholder.
Owning your own company’s stock adds another dimension to your investing, where you can view your company as an external shareholder, and a much clearer (internal) view of your company to better assess its future.
Add to Your Financial Engine
Your financial picture is made up of many parts. Bank accounts, investment accounts, retirement accounts, estate plans, and much more. Your stock plan is another asset working in your financial favor. You can benefit from rising stock prices of course, but you also are eligible to receive dividends if your company pays them, which is another boost to your finances.
As you sail the investment seas to your retirement, your stock plan is another oar in the water to get you there faster.
Have questions about company stock investing? Let’s talk! Schedule a no-sales conversation with the team at Watts Gwilliam and Company to see how we can help.
Risks of Owning Company Stock
But, receiving stock plan rewards still has risks, like any other investment. There are plenty of pros that come with your company’s stock, but it’s important that you know the cons as well.
Naturally, owning company stock means you bear the risk of the stock price falling while you hold it. You get employee stock purchases at a special discount, of course, but it’s still important to watch your company’s stock price performance over time, otherwise you might be “catching a falling knife” as time passes by participating in an ESPP and your company’s stock poorly performs.
Shares sold that were originally purchased at a discount are considered additional compensation. They are taxed like wages, salary, tips and commissions, otherwise known as ordinary income. These tax rates can be up to 35%, depending on your income level. If you decide to sell, think about what this means for your income level for the year, so you’re not blindsided by a high tax bill.
Opportunity Cost (Would You Have Bought the Stock Otherwise?)
Though it seems like a strong investment choice, it’s important to consider whether or not you would buy your company stock if you weren’t an employee. Of course, as an employee, you are privy to the ins and outs of your organization, but make sure that you can see a legitimate investing opportunity from owning your company stock.
Other Factors Company Stockholders Should Be Aware Of
Your company stock plan may be separated from your go-to stock portfolio, but it’s still important to include it in your core financial plan. It still affects your overall allocation, and personal risk level.
Owning company stock is just like owning stocks in your personal portfolio. They need to potentially be rebalanced over time, or accounted for in relation to your other investments. What category does your company fall under?
For example, if you work for a large-sized company with a market of over $1 billion, owning its stock means you’ll be adding to your large-cap allocation every time you receive shares, which ticks your portfolio higher on the risk scale more aggressively.
To keep your portfolio balanced, you may need to slightly reduce your stock allocation in your core portfolio by investing in more bonds or lower risk investments. Otherwise you’ll be taking on more risk by being in an over-concentrated stock position. A smart financial advisor in Gilbert, AZ can advise you how to manage concentrated stock strategies.
Failing to rebalance might cause your risk level to be higher than your actual risk tolerance, putting you at risk of getting hit harder than the average investor in the event of a market decline. This is why diversification is important in investing.
Stock Price Changes
As you know, stocks rarely move in one direction, they are constantly fluctuating.This is important to remember because this means that you might obtain your stock plan shares at different prices during every vesting period.
Falling stock prices aren’t always fun to experience, but you’ll be buying more shares at a lower price. On the flip-side, when your company’s stock price increases rapidly, you may be obtaining fewer shares. If you decide to be a long-term shareholder, keep in mind that you’ll likely follow a dollar cost averaging strategy, where you’ll participate in all of your stocks increases and decreases while receiving dividends.
The Bottom Line
Company stock plans are uncommon, but can be a great benefit to your finances. From your discount, to receiving dividends and more, an ESPP can be a solid wealth building tool. It can certainly show strong financial merits over time.
Consistently assess the value you receive from investing in your own company, determine whether or not your company has long term growth potential. Most importantly, remember to account for your company stock when forming a financial plan with your advisor, to keep all of your finances balanced and cohesive. Building wealth requires you to consider your entire investment portfolio. As hard as you work for your money, always remember to let your money work for you.
At Watts Gwilliam and Company, we’re passionate about helping you accomplish your financial goals, whether that’s preparing for a happy retirement or buying your next home. If you’d like to know if you’re on track to reach your goals, schedule a complimentary conversation with our team. We can help you analyze your risk tolerance to create a customized investment plan that puts you on the right track to reaching your dreams while allowing you to sleep peacefully at night.