Employee stock purchase program: Free money? Am I just bad at math?

Tangentally, another vehicle companies use for giving you free money is 401K matching. My company matches my 401K contributions up to a certain amount, and it is vested right away. For me, it is free additional money going into my long-terms savings that I don’t even really see. Still, there are those in my company who do not take advantage of this by avoiding contributions to the 401K plan. I think a lot of them can afford some sort of contribution, but as stated, they would rather spend their money on other things, and they are leaving money on the table.

I also think workers should diversify their portfolios so they aren’t subject to high risk. It’s a two way street, with each party seeking to meet their own needs and interests. When you have a large percentage of your portfolio in the same company you work for all sorts of alarms should be going off.

The smart approach is to take the deal like this without hesitation. If you can sell immediately, it really is free money. The thing is, you shouldn’t hold on to more than a small fraction of the stock. After all, if your company was such a good bet that you would want to have all your investment in it, you would have invested money even if there wasn’t an employee discount program.

Even if you cannot sell immediately, it sounds like a straightforward task to look at the volatility and prospects of the company stock, and decide if it is a good bet to buy the stock at the discount and hold it.

Basic market hypotheses (that the stock price has future gains baked in) means you will come out ahead most of the time doing this.

You only need to hold it for a year and a day to get the long term rate.

That’s a fair point (as is jharvey963’s).

i would suppose it would depend on the type of industry you’re in; some are subject to more volatile fluctuations in share price than others.

My point was more intended to say that, from a company’s point of view, shareholding employees would be more motivated.

i.e. “we” rather than “them and us”

Just IMHO…

Before you count all of your chickens, look into transation fees. My employer pays an fees associated with acquiring the stock, but I do have to pay a fee at time of sales, to the brokerage. My fees are based on the value of the stock, not the gains, so selling at the cost I bought at would result in a small negative for me.

[quote=“trabajabamos, post:1, topic:680434”]

[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 money[/ul][/li][/QUOTE]

Hold on a tick…If your ESPP plan is like mine, you will have two prices; that set on the date of the offering, and the market price on the date the shares are purchased. In our ESPP, you pay 85% of the lesser price. Double-check this with the plan administrator.

Back in the Good Old Days, my company’s plan was like that too. The employee’s purchase price was 85% of the lower of the opening and closing price. Plus, the company withheld your money during the year and paid 5% interest on that money. I remember once the company’s stock ran up big-time in mid-year, and I shorted the stock, in the amount of shares that I expected to receive. But that was the good old days.

Then they gutted the plan. Now, you pay 95% of the price on the closing day, so your max profit is 95% off the bat. (I believe this is somehow related to tax law.) Then the plan administrator charges a hefty fee to sell the stock - probably about 1% (IOW 20% of the profit). And if the price swings a bit from when you get the shares until you can sell (and it probably declines a bit as a general rule due to employees selling their shares) you can lose more. Plus they stopped paying interest on the withheld money.

I no longer participate.

I’m motivated by taking care of myself and my family. I diversifying my savings so that if the company tanks (and all companies can tank for any number of reasons) I’m taken care of. I really don’t give a crap what the company thinks is in their best interest.

There’s an article in Nautilus suggesting that it’s natural, neurologically speaking, to think of your future self as a stranger. Why should I give up something I could by to benefit him?

The simple realization of the fallacy of that type of thinking goes a long way to explain why some people are never going to get ahead financially. I know people like that too. I think everyone does but is the one of the best habits you can break out of. I do things to benefit my future self or my kids (in the future) all the time.

It depends on the company. Are you sure it will stay stable? It could be a good place to put your money or a bad place. Anyone remember Carter Halley Hail? Emporium, Wynestocks, Broadway stores?

Aren’t most ESPPs done through payroll deductions also? Such that making an $8.5K one time purchase wouldn’t be possible (for most people)?