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If the company you work for is publicly traded, you may have the opportunity to buy shares of its stock, possibly at a substantial discount from what other investors must pay. Should you take up the offer? And, if so, how much money should you consider investing? The key to making those decisions is to try to approach them dispassionately, as you would with any other potential investment. This article can help you decide.
Key Takeaways
- Many publicly traded companies offer employees an opportunity to buy shares of their stock.
- Often the shares are priced at a discount from what outsiders would have to pay.
- Companies can offer shares as part of an employee stock purchase plan (ESPP) or as an investment option in their 401(k) retirement plan.
- Companies can also give shares of stock to their employees through an employee stock ownership program (ESOP) or as a matching contribution to the employee's 401(k).
Why Would a Company Offer Shares to Its Employees?
Companies offer shares to their employees for a variety of reasons. One is to build loyalty—an employee who is financially invested in a company may be emotionally invested in it as well and put in a greater effort toward making it successful.
Companies also offer shares, often at a reduced price, as an incentive in recruiting and retaining talented employees. From a company perspective, including stock as a part of an employee's pay package can also be more affordable than paying them entirely in cash. This is particularly common at startups, which usually need their cash for other purposes.
Many companies also use stock options for much the same purposes. Unlike shares of stock, stock options simply give employees the right to buy shares at a set price at a certain point in the future. If the stock rises in value in the meantime, the employee can later "exercise" their options and buy the shares at the bargain price. Now that they own the actual shares, the employee can either sell them at a profit or hang onto them in hopes of further appreciation.
How Buying Shares of Your Company Works
Depending on your company, you may have several different ways to buy shares. These can include:
Through an Employee Stock Purchase Plan (ESPP)
In an employee stock purchase plan (ESPP), the company sells shares directly to workers, often through automatic payroll deductions. In addition to not having to pay brokerage commissions, employees often get a discount on the shares, frequently on the order of 15%. Typically, there are no restrictions on when the employee can sell their shares.
ESPPs are similar to employee stock ownership plans (ESOPs), which are another common way for employees to obtain shares of their company's stock. The key difference is that in ESPPs, the employee buys the shares with their own money, while in ESOPs, the company provides them free of charge, often as a form of retirement plan.
Through Your Company's Retirement Plan
Many companies offer their own stock as one of the investment options in employees' 401(k) retirement plans. Some companies also use shares of their stock, rather than cash, when they match their workers' voluntary contributions to these plans.
$25,000
Maximum value of employer stock you can purchase each year through most ESPPs.
Pros and Cons of Buying Shares of Your Company
As with any kind of investment, company stock has some pluses and minuses.
Pros
- Easy way to save and invest: Many employers make it very simple to invest in their shares, such as through automatic payroll deductions.
- Possibility of a good discount: Companies often sell shares to employees at a discount from the regular market price.
- More personal involvement with the company: Owning a piece of your company can make you feel more a part of it (as your employer may have intended).
Cons
- Potential lack of diversification: Given the ease with which you may be able to purchase shares—on top of the shares you might receive as an employee benefit—your company stock could become a disproportionately large portion of your portfolio.
- Ties job risk to investment risk: Investing in the company you work for puts you at risk of losing both your job and your investment if the company hits hard times.
Is It a Good Idea to Buy Shares in the Company You Work For?
As mentioned earlier, determining whether to invest in the company you work for is a decision that is best approached dispassionately, whether you love your company, hate it, or fall somewhere in between. Here are some questions to ask yourself to help you decide.
Can you afford it? Depending on your income and the various financial demands you face, you may not have a lot of spare cash for investment purposes at this stage of your life. So you'll want to be selective in the investments you choose and, sentiment aside, buying shares in your employer may not be your best option.
Would you invest in this company if you didn't work for it? Here is what to consider: How has the company performed relative to others in its industry? Is its industry growing, relatively stable, or slowly dying? Do its managers articulate a strategic vision that makes sense or simply fall back on the latest buzzwords? Do you believe the company to be well-run based on what you've seen from the inside?
What do professional investment analysts think? Aside from your own opinions, what do other, possibly more objective observers have to say? If you have a brokerage account, that firm may have research and recommendations regarding your company that are accessible online. You can also find information on the U.S. Securities and Exchange Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) website.
Is any discount you're offered enough to make up for whatever reservations you might have? If you're on the fence about whether your company is a smart investment, a sizable discount from its current market price could be a deciding factor, especially if you expect to sell relatively soon.
Will it throw your asset allocation out of whack? Owning too much stock—especially too much of any one stock—could mean taking on more risk than is appropriate for someone in your situation. This can be particularly important as you get closer to retirement.
Would Buying Company Shares Increase My Career Possibilities Within That Company?
Probably not. In a large company, higher-ups may pay little attention to who is or isn't buying shares or have no way of knowing. If you're in an executive position, however, there may be some expectation (subtle or otherwise) that you participate in the company's employee stock purchase plan (ESPP), if only to set an example for others.
What Is Insider Trading?
Insider trading is an illegal activity, in which company insiders (or outsiders they are in cahoots with) act on important information that's not available to the public to buy or sell shares of their stock.
Can I Sell My Company's Shares Whenever I Want?
That depends on how you obtained them. If you bought your shares through an employee stock purchase plan (ESPP), they're yours to sell as soon as you take possession of them. However, if you received them through an employee stock ownership plan (ESOP), you may have to wait until a qualifying event occurs, such as retirement or leaving the company, before you can receive a distribution of your shares. Even then, distributions may occur in installments rather than a lump sum. Your company should clearly spell out its vesting schedule and distribution rules.
How Much Company Stock Is Too Much?
As a general rule, most financial planners and other experts say it's prudent to have no more than 10% of your portfolio in any one stock, including your employer's.
What's the Main Difference Between an ESPP and an ESOP?
From an employee point of view, the principal difference between an ESPP and an ESOP is who pays for the shares. In an ESPP, the employee buys them. In an ESOP, the employer provides them free of charge.
The Bottom Line
Shares of stock in the company you work for can be a good investment if the company is well-run and appears to have a solid future. That's especially true if you're offered a substantial discount off the regular market price, as is often the case. However, it's also important to stay properly diversified and not load up on company stock simply because it's cheap or easy.