In this article, we will discuss four things regarding the employee stock purchase program (ESPP) your company may be currently offering. These include:
1) What exactly is an ESPP?
2) What are the main benefits?
3) Who should avail of it?
4) The common pitfalls.
#1: What exactly is it?
An ESPP is an employee benefit some companies offer. Essentially, it is a program allowing you to buy company stock at a discount. You may receive a 10% to 15% discount at purchase. Your employer will deduct money from your paycheck to purchase these shares. You may also find it interesting to know that the company buys the stock for you every six months.
#2: What are the main benefits?
The discount is easily the most significant benefit of the program. After all, who can resist the opportunity to buy great things at a bargain? If you have an opportunity to buy something that may grow in value at a 10 or 15% discount, you will be likely to grab the deal. Then think about the profit you can lock with this deal when you sell the stock.
#3: Who should avail of this ESPP benefit?
To answer this question, you need to consider specific alternatives. If you decide to participate in this program, you must remember that the company will deduct the purchase price from your paycheck. As a result, your take-home pay would become less, and if your budget is already tight, this could become problematic.
However, if you have sizable budget flexibility, contributing more towards this program could be a great idea. Some companies allow their employees to contribute as much as 25% of their salaries to their ESPP. Even simple math will tell you this could become a prominent figure.
4. What is the main pitfall of participating in your company’s ESPP?
This is the last key consideration you must turn your attention to. You may not want to let the company stock accumulate over time. You might find it tempting to do so, especially if you are fortunate to be working in a good company. A steady rise of company stocks might be routine for your workplace, and you may let this factor play with this consideration. But holding a considerable sum of money in a single stock is an extremely risky endeavor, and one best to be avoided.
Now that we have summarized the four key things you need to know about the employee stock purchase program, here are some questions to consider:
- Are you willing to participate in the enrollment period when it is available in your company?
- Do you think you are capable of making this commitment?
- Are you thinking about changing the percentage of how much you will contribute?
We would love to hear from you! Feel free to let us know any feedback about this article as well as any questions or topic recommendations you would like to see in future articles.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help middle-class professionals achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.