My job allows me to participate in an employee stock purchase program (ESPP) which entitles me to purchase company stock for 85% of the market rate. Anecdotally, people claim you’d be crazy not to participate because it’s FREE MONEY!!!
But I got to thinking that there must be a catch. Well, catches:[ul][li]Like every investment, you’re betting that you’ll sell for more than you paid; if the stock price tanks, I’ll lose moneyThere are taxes to consider; short-term capital gains and long-term capital gains are taxed differently[/ul][/li]“You don’t even have to hold the stock for two years!”*, they say, “you’ll make money even if you sell right away and are taxed the higher rate!” This is music to my ears; I get money right away and don’t have to watch the stock ticker for two years!
Scenario #1: I buy $10k worth of stock for $8.5k. I immediately sell my $10k investment at market rates and pay something like 25% in taxes (short-term capital gains are taxed like ordinary income), walking away with $7.5k. Terrible! I’ve lost money!
Scenario #2: I hold my $10k investment for two years and pay the more favorable long-term capital gains rate of 15% and end up with $8.5k. Terrible! I incurred all that risk for nothing!
…Which leads me to wonder if the people who claim this is some kind of “Can’t lose” proposition just aren’t really paying attention? Sure, if the stock suddenly tripled in value I’d be rolling in it, but I’m trying to be pragmatic here: this is a large company with a plodding, upward trend that you can see on loooong timescales.
(These numbers all assume I’m in the 25% tax bracket)