Finance experts and advisors will more often than not advise against buying individual stocks, but there is one exception to that rule: the company stock plan.
People who don’t have much exposure to commerce or finance, such as technology employees, often miss out on this brilliant opportunity. Keep reading to find out more about handling your company stock plan.
A company stock plan is essentially a company-run program where employees of a publicly traded company can purchase stock in the company at a discounted price. Think of it as a loyalty bonus for employees. Companies usually have an offering period and a purchasing period.
In the offering period, employees’ contributions are made via payroll deduction, meaning a certain sum will be deducted from the employees’ paychecks. The purchasing period is when the company purchases the discounted stock at your behest.
For some firms, a stock plan is a way to kindle a sense of ownership in the employees, which boosts morale and improves work ethic.
The stock price discount you get with a company stock plan is always advantageous. If you take advantage of this plan, you may end up making a lot of money. But one wrong move can lead to losing your money, too. Let’s take a look at a few important factors in deciding whether or not to invest.
Assess Your Company
Even though the discount may be appealing, you should always assess your company. Is the company doing well? Are there any problems on the horizon—either in your industry or specific to your company—that you should be worried about as an investor?
When deciding whether or not to invest, decide if you’re making this investment because it’s the best choice or simply because you’re tempted by the discount. Research your company’s history and other alternative investment options available to you to see which one is the best choice.
Know Your Holding Period
The money you can make off employee stock purchase plans (ESPPs) is determined by the decisions you make. If you sell your shares too quickly, you may pay unnecessarily high taxes. For example, if you hold the shares for less than two years, your profit when selling will be taxed as ordinary income. However, if you’ve had them for more than two years, the profits you make will be taxed as long-term capital gains, which are often taxed at a lower rate than ordinary income.
One of the worst things you can do is put all your eggs in one basket. If all your investments are tied up in your company stock plan and your company were to run upon hard times, you could lose your job and your savings. Ideally, shares of a single company should make up no more than 20% of your portfolio.
Contribute the Right Amount
It’s crucial to know how much you can contribute to your stock plan without affecting your savings or lifestyle. Selling your company stocks too early may incur fees, so it’s best not to think of them as an emergency fund.
Qualifying Stock Plans
A qualifying employee stock purchase plan complies with Section 423 of the Internal Revenue Code and therefore gives employees some extra benefits. The total value of the shares is taxed as regular income, and only the profit incurred is taxed differently.
Non-Qualifying Stock Plans
In a non-qualifying employee stock purchase plan, the difference between the fair market values of the shares and the price paid by the employee is taxed as regular income; any loss or profit realized is taxed as a capital gain or loss.
Wall Street is a confusing place, and it is best to go in well-informed. Your decisions can mean the difference between a hefty retirement fund or losing your life savings in a heartbeat. Financial planning should always be guided by a strategy. The nature of your situation determines the next step for you, whether it is selling your stocks or holding on to them. We hope that our guide helps you manage your company shares properly.