One of the biggest challenges an employer faces is keeping employee morale up—and in 2020, that’s never been more true! I feel confident saying that your employer is always looking for ways to both reward and effectively motivate you. If they can align your financial well-being with that of the company, it will motivate you to do your best and contribute positively to the company’s performance. One of the ways an employer can do this is by offering an Employee Stock Purchase Plan (ESPP). So let’s break down the details so you can make an informed decision about whether or not to participate.
How Does An Employee Stock Purchase Plan Work?
An ESPP is a program where your employer gives you the opportunity to purchase company stock, usually at a discounted price. Since your employer runs the program, they make it easy for you by withdrawing the money for the purchase automatically from your paycheck on a regular basis.
During the “offering period,” you accumulate payroll deductions; then during the “purchase period,” those deductions are used to purchase stock. Then you simply own company stock and can do with it whatever you see fit.
While your company offers it as a benefit, participating in the ESPP is not always the best choice for everyone. Here are some things to consider when deciding whether or not to participate in your ESPP.
Benefits Of An Employee Stock Purchase Plan
Discounted Prices
The most obvious benefit of the ESPP is that you can get stock shares at a discounted price. The discount varies by plan and can be as high as 15%. Some plans even offer a lookback provision that makes it possible to get an even steeper discount if the stock price has gone up during the offering period. In addition to the price discount, you don’t have to pay commission fees on the purchase, which saves you even more.
Easy Investing
The stock market can be very intimidating for a beginning investor. In fact, a lot of people avoid investing because it is too confusing. An ESPP makes investing easy. All you have to do is tell your HR department how much you want to invest and they take care of the rest. You get automated, regular investments in a company that you’re already familiar with and trust.
Potential Tax Advantages
If your ESPP is a qualified plan, as most are, then you can also get tax benefits not available with other types of investments. You realize these benefits when it’s time to cash out and sell your company shares. There are certain rules that must be followed to receive tax benefits, so you need to become familiar with your specific plan before taking action.
The Risk Involved With Employee Stock Purchase Plans
As with everything, there are also potential downsides to participating in your ESPP. The major risk is one of the most well-known words when it comes to investing: diversification. Diversification is simply spreading your wealth around, not keeping all of your eggs in one basket.
If you’re mostly investing through your ESPP, then you could end up with a lot of your wealth tied up in only your company’s stock. That’s dangerous if your company performs poorly. It is better to have your wealth spread between various companies, or even types of investments, so one poor performer only has a minor impact on your overall portfolio.
Not only do you need to diversify your portfolio, but your overall financial well-being as well. Your regular income is already dependent upon your employer. Do you want all of your investments to be dependent upon them as well? If you have multiple income streams, then this may not be as much of a concern, but if you’re completely dependent upon your salary from this employer, it is an important thing to take into consideration. If something goes wrong, you don’t want to lose your job and all of your investments at the same time.
While they do offer nice benefits, ESPPs can expose you to more risk than necessary because of a lack of diversification in your portfolio and your overall financial life.
Questions To Ask Yourself
After considering the advantages and risks of an ESPP, you should ask yourself the following questions:
Would I be investing this money in stocks otherwise?
If there was no ESPP, what would you be doing with your money? If you would be investing it in the stock market, then the ESPP might be a great opportunity for you. But if there are other things that would otherwise be more important to you, such as paying off debt, then perhaps the ESPP is more of a distraction from your true financial priorities.
Would I invest in this stock without the ESPP?
In the end, the ESPP is an investment and should be treated as such. You should research your company just as you would any other investment. After doing your research, would you still choose to invest in your company? If your company is a poor investment, then even receiving a 5% discount on the purchase price may not be enough to make up for the lack of returns you would get with a superior investment. However, if your company is a good investment, then your returns will be all the greater for the discount you receive.
Seek Professional Help
Although an ESPP can be a great opportunity for an employee, your own personal financial situation and goals will determine whether or not you should participate in yours. You need to make sure the ESPP aligns with both your short-term and long-term financial goals for it to be the right move.
Don’t worry, you don’t need to make this decision on your own. An experienced financial advisor can help you determine how an ESPP can fit into your lifetime financial plan and whether your particular company’s plan is a good deal. If you have an ESPP you’re considering participating in, before you make the leap, our team at Haydel, Biel & Associates (HBA Wealth) would be happy to discuss the decision with you. Contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.
The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.