Employee meeting to discuss when to buy and sell ESPP sharesIf you work for a publicly traded company, it may offer an Employee Stock Purchase Plan (ESPP). ESPPs allow you to purchase stock at a reduced price through payroll deductions. The discount makes these plans an attractive investment option. Here’s what to consider before buying into an Employee Stock Purchase Plan (ESPP), as well as what to consider when it’s time to sell. 

What Do You Know About The Company’s Finances?

Research is always recommended before investing in stock. This applies to your company stock too, whether you’re buying it electively through an ESPP or being awarded stock through stock options or Restricted Stock Units (RSUs).

How much do you know about your company’s finances and future outlook? If you’re not sure about your company’s outlook, you could be making an uninformed investment decision. While the discounted price is enticing, be sure you’re buying the stock on fundamental investment merit as well.

How Secure Is Your Position?

Investing in your company stock expands your financial exposure to your employer to include both your future earnings and your investment potential. That’s a lot of eggs in one basket. Make sure your financial resources include an emergency fund and other diversified investments.

Do You Have Other Stock Awards?

Companies that offer ESPPs frequently also offer stock awards like stock options or Restricted Stock Units (RSUs). If you’re the recipient of stock options or RSUs as well, consider how much exposure to one company makes sense from an investment standpoint.

How Much Is Too Much?

Stockpiling your company’s stock can be unwise. While everyone hopes for a stock feast, can you risk a stock famine? We typically recommend limiting the value of any one company stock to no more than 5% of your overall investment holdings. This makes it a meaningful position, while limiting risk potential.

How Quickly Will You Sell Your ESPP Shares?

Part of the decision to invest in an ESPP should center around how quickly you plan to sell the shares.

Simply buying the stock to sell it after the minimum holding period can be a risky proposition, especially if your cash flow relies on turning a profit. Even if you receive a 15% discount, the markets can move 5% in just one day, and individual company prices can swing far more dramatically.

Whenever you buy a stock, including your employer’s stock, it needs to be for the long-term. This allows you to ride out a potential stock market or company event. Furthermore, a longer holding period could help reduce your tax burden when you sell the stock.

When Should I Sell?

Whether to sell your ESPP shares depends on multiple factors, including:

The Stock Outlook

What’s the financial outlook for your company and its stock, based upon your research? If the stock’s trading near all-time highs, being greedy can prove dangerous. Conversely, if the stock price is subdued, why, and what’s its chance of recovery in the near future and longer term?

Your Stock Concentration

You may want to sell if your investments are over-concentrated in company stock. While everyone hopes their company does well, remember that virtually every company faces stumbles, some larger than others. A bird-in-the-hand approach may be prudent.

Other Stock Grants Scheduled To Vest

Stock grants are often sequentially structured as an impetus for you to remain an employee. If you have a large number of shares vesting on the horizon, selling some shares now will allow you to reinvest and diversify investment risk among other holdings.

How Can I Manage My ESPP Shares?

Most company plans allow you to place limit or stop orders that help you achieve stated stock prices upon sale.

A limit order specifies a future price, above the current trading level, at which you wish to sell.

Example: Your company stock’s currently trading at $70/share. You would like to sell your stock if it reaches $75/shr. Setting a limit order will trigger a sale if the stock trades at $75/shr.

Conversely, a stop order sets a bottom threshold at which you would like to sell if the stock declines. It should be understood that stop orders can execute below a stated level, unless you place a ‘stop limit’ order. However, this may or may not execute in a fast-moving market, as the stock must fully execute at the stated price, not below.

SageVest Wealth Management is a top-ranked, fee-only fiduciary advisor, serving NoVA, MD, DC and beyond. We advise on the totality of your finances. This includes ESPPs and other company stock plans, helping you to maximize your employment benefits and capture the wealth potential that your job offers. Please contact us to learn more about our investment management skills and our comprehensive financial planning services.

Prepared by SageVest Wealth Management. Copyright 2019.

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