MoneyDo: Evaluate Your Employee Stock Holdings: How Much & Where
Many employers give their employees the option of purchasing stock in the company, as a benefit to employees. In this week’s MoneyDo, we’ll encourage you to consider investing in your employer’s stock, if it’s an available benefit. We’ll dig into some general rules around that particular investment – and some things to watch out for while considering the move.
One of the biggest advantages to owning stock in the company that employs you is that in general, employees have a good handle on the health of a company. Think about where you work. Consider how you feel about company’s success and growth. You’ll have as clear an insight as any into whether it’s on its way up or has seen better days in the past.
Another benefit sometimes offered is an employment discount on stock purchases. Many companies will encourage employee ownership, and might even offer a 10 to 15 percent discount on the purchase price. In those cases, just purchasing stock results in a net positive. Typically, discounts come with some restrictions such as holding periods, meaning you might be required to hold the shares for a certain amount of time.
Every opportunity has a potential downside, and employee stock purchasing is no different. As we’ve discussed in many previous MoneyDo’s – diversification is key. If you already own shares of your employer’s stock, or are considering it, how much of your portfolio would you feel comfortable tied to in this one investment?
Not only should you look at your employer’s stock investment as a percentage of your overall holdings, consider the effect to your overall net worth if something would happen to the company:
- What happens during a downturn in the market, or the economy?
- How volatile will the company stock be?
- If the stock represents a bigger holding in your portfolio, will you be able to stick with it or would you panic and sell when it is low?
- Worse yet, what happens if the company is struggling and has to lay off employees, maybe even you? You’d find yourself in a situation where the value of your investment has gone down, and you’ve lost your income.
Many times, it’s easy to understate the risk in the company that you work for. If you work for a Fortune 500 company, you probably feel like investing in your company stock is safe. Through the years, we’ve seen many situations where “too big or too successful to fail” has been the preeminent feeling of employees and has turned out not to be the case.
Just ask the employees of Enron, who lost everything when their employer was caught in one of the largest cases of fraud. Your company might not fit that description, but recent examples of companies like GE, which are experiencing huge drawdowns on their stock price, consider the possibility.
Lastly, if you’re in position to invest in your company’s stock, working with a wealth manager who can offer assistance on tax planning will provide great benefits. Structuring how you invest in the stock can create thousands of dollars in savings over time. Strategies like Net Unrealized Appreciation can change how you report the sale of stock and minimize how much you pay in taxes. Find an advisor you can trust to give you insights and direction on the transaction.
