ESPP - What would you do?

[kjpliny]

I was talking with a guy at work the other day about the Employee Stock Purchase Plan, which allows deductions from your pay check to purchase company stock at a 15% discount. The maximum amount you can contribute is $25k per year which comes to around $960 per paycheck (after tax money).

The plan is broken up into two 6-month periods. What they do is keep the money that you contribute each week, and at the end of the 6 month period, they purchase shares at the lower stock price of either the first day or the last day of the 6 month period, minus 15%. This means you get a guaranteed 15% gain on your investment, minus whatever you would get had you taken the money each week and put it in savings, invested it separately, etc.

Assuming you could contribute the maximum allowed and sold the shares as soon as the period ends, you could make an additional $3750 per year at a minimum (minus what you'd make outside of the ESPP if you didn't join the plan), and more if the stock actually went up.

Has anyone done anything like this and do you think it's worth the hassle of living off less money each week to get it all back plus 15% at 6 month intervals? If so, how much would you contribute? I have a few weeks to consider whether or not I should do this. You can quit making contributions at any time, but you can't get back in the plan until the next offering period starts. A modest trading fee is applied when you sell the shares ($6 I think).

 

[Cut-Throat]

Yup! - We do it! - To the Max!

Anytime I can get a guaranteed 15%, I'm in!

 

[justin]

You could always use options to hedge your risks. Probably more like a guaranteed 13% return that way, but it will be guaranteed.

 

[lswswein]

You cannot beat the guarenteed 15% minimum. We have it at work and I do it too. Also I sell it immediately. You could get more than 15% some pay periods when the stock goes up at the end of the period. If your company
stock is volatile you coul get a great deal. So surely enroll

-h

 

[DRiP Guy]

I do it.

It is a beautiful thing.

10-15% if the stock just goes sideways, and if it goes up, more gravy.

Even people that are cash-tight can do it, and are using the money (gotta pay short term CG rate if you take it out right away) as vacation fund, emergency fund, etc.

You don't see the money, so you don't spend it, and if you happen to be eligible for a bonus or profit sharing, you can typically have the same or even more proportion of that thrown into the same plan.

 

[soupcxan]

Some companies will prohibit you from participating in the ESPP if you routinely sell the shares as soon as they're yours.

There may also be an official policy against shorting or purchasing put options on your company's stock.

I would check on both of these before executing.

 

[youbet]

I participated in a plan run exactly the same way at the Megacorp I retired from. Sooooo sweet! So good that I can't understand why they haven't cancelled it yet! It makes me excited just thinking about it........ It's one of the few things I miss about Megacorp now that I'm RE. Absolutely participate no matter what you have to do to get the money.

If you plan to sell the shares immediately, there is no risk and that is the best way to do it. Also, the minimum annual yield is 30% (15% twice a year). And you get the minimum 30% annual on the total amount they deduct from your check during the six month period but you get to have the money taken out of your check over the six months! So sweet...... !!

There is no risk....no need to hedge. Just sell immediately.
The minimum yield is 30% annualized. (15% twice a year)
You get the yield on the total amount contributed for the period, but get to contribute it slowly over the period.
If the stock is volatile, some periods you will get well over the minimum!

So sweet........

BTW, did I mention I liked the plan and miss it now that I'm RE?

 

[runchman]

Heck yeah do it, I did it for years at my company. Most unfortunately, we got bought by another company that has no such plan.

As far as living on less money, you really only have to for the first 6 months, since after that you are cashing out every 6 months. You could cash out, pay yourself back your deductions, and invest the gain in an index fund. Or better yet cash out and invest it all.

And not to be a math pud but it is actually a 17.6% gain. Suppose the stock was at 100 and you purchase at 85:

100/85 = 1.176 = 17.6% gain, woo-hoo !

never pass up free money

- John

 

[Spanky]

f you can sell immediately, then it is a good deal. Some companies have policies that require you to hold it for a specified period. If it is a non-qualified option, you might have to pay tax on the 15% discount.

 

[Animorph]

Both DW and I participate in ESPP's. I have also frequently held the stock when it was much lower than normal.

The tax treatment is complex, especially if you hold for long term gains, but you can survive it. DW had a spinoff (shares split into two different companies), a split, and dividends while we were holding ESPP shares. If I'd known how bad that would be to figure out for taxes I would have had her sell for the 15% gain immediately. If you don't have any of that, it's a bit easier. I just hate being taxed at normal income tax rates.

Dan

 

[Texas Proud]

f you can sell immediately, then it is a good deal. Some companies have policies that require you to hold it for a specified period. If it is a non-qualified option, you might have to pay tax on the 15% discount.

Yes.. this is important... my company only has a 5% discount... and if you sell shares inside the plan you can not get in for another year... you can have the shares issued to you, but then you have to have the deposited in a trading account.. a hassle... and the discount is considered income for taxes... so even though it would be good under YOUR post..

 

[wstu32]

my advice... remember enron? remember some sub prime companies? these stocks were trading at 60-70-80 bucks and in a matter of weeks...worthless. dont ever think it can not happen to to your company

so invest some, but DO NOT put all your eggs in one basket. 10% of portfolio max

 

[saluki9]

You could always use options to hedge your risks. Probably more like a guaranteed 13% return that way, but it will be guaranteed.

More like 5-6% cost to hedging. Assuming the company was as blue chip as GE you're even in the 5% arena for a year of hedging.

 

[teejayevans]

discount is considered income for taxes... so even though it would be good under YOUR post..

Income or capital gains when you sell it?? I assume if its income your company
would add it to your W2s somehow.
My company used to have the 15% plan but due to tax law changes went with
5% plan, I had more than 10% in company stock anyhow, so I dropped out at
that point.

 

[runchman]

my advice... remember enron? remember some sub prime companies? these stocks were trading at 60-70-80 bucks and in a matter of weeks...worthless. dont ever think it can not happen to to your company

so invest some, but DO NOT put all your eggs in one basket. 10% of portfolio max

That's why I always sold right away, and re-invested in my standard asset-allocation. You do take the tax hit, but that's better than taking the enron hit !

- John

 

[GLM]

Yep did that before company went private . While kids were in college gifted the max to them to sell as their short term capital gains were less. One of the perks of a good cash flow.

 

[Texas Proud]

Income or capital gains when you sell it?? I assume if its income your company
would add it to your W2s somehow.
My company used to have the 15% plan but due to tax law changes went with
5% plan, I had more than 10% in company stock anyhow, so I dropped out at
that point.

The discount is considered ordinary income, not capital gain...

ALSO... at least for my company, the dividends also buy at the discount... so if you want to hang on to some of your company stock, this is the better place..

 

[youbet]

my advice... remember enron? remember some sub prime companies? these stocks were trading at 60-70-80 bucks and in a matter of weeks...worthless. dont ever think it can not happen to to your company

so invest some, but DO NOT put all your eggs in one basket. 10% of portfolio max

It would be a shame to not take advantage of easy, low risk money. You're describing a scenario almost totally unrelated to the ESPP plan OP described.

To review....... Cash is taken from your paycheck for six months. At the end of the period, your cash is used to purchase shares at a 15% discount from the price that existed the first or last day of the six month period, whichever is lower. You buy the shares and immediately sell. Your only risk is price movement between the time your discounted purchase price is locked in and the day you are free to sell the shares. That was typically three business days where I worked.

These plans are NOT about accumulating large positions in your employer's stock, or at least the rules typically allow you to not accumulate. They're about making 30% annually on your money, minimum, and more if your company's stock is rising.

I'm a real doubter when it comes to anything that sounds like a free lunch. But these ESPP plans, like I had and like the one OP described, really are too good to pass up. High gains and low risk.

We were only allowed to participate with 10% of our salary. I would have particiapted with 100% if they would have allowed it, using savings to live off of while the six month period rolled by.

 

[free4now]

Yep, the ESPP plans that give you a 15% discount are definitely worth participating in, to the max. I participated fully even in my first year of working when I had to use credit cards balances to get by without that money for 6 months. It's that good.

IIRC I calculated that earning 15% over 6 months is equivalent to an annualized daily-compounded rate of 40 something percent. The only risk you take is that the stock could go down in the week or so between when you exercise the shares and when you can sell.

 

[Tracy42]

Definitely take advantage to the maximum! In my experience, the 15% discount was the absolute minimum return I have experienced. Often it is 20 - 40% because of the added advantage of the shares being issued at the lower price of either the 1st or last day of the period. This was huge for me.

I calculated the 15% discount to be equal to a 3% raise on my salary. Would you turn down a raise? Go for it! Tracy

 

[ERD50]

. Your only risk is price movement between the time your discounted purchase price is locked in and the day you are free to sell the shares. That was typically three business days where I worked.


I'm a real doubter when it comes to anything that sounds like a free lunch. But these ESPP plans, like I had and like the one OP described, really are too good to pass up. High gains and low risk.

We were only allowed to participate with 10% of our salary. I would have particiapted with 100% if they would have allowed it, using savings to live off of while the six month period rolled by.

Absolutely, YES, DO IT!!!!

I had the same plan at the mega-corp I retired from. No limit on selling at once.

I used to scream at my co-workers to do it. I couldn't believe that people were willing to turn down 'free money'. Like youbet, I am very skeptical of a 'free lunch' offer - but this is really a company benefit that is offered. Take advantage of it! Would you turn down the health care, or vacation, or a raise?

Sell immediately. If you hold, you wipe out the 'almost guaranteed' part. This is the lowest risk, legal, almost guaranteed chance of getting a minimum of 32% annual return you will ever see. You might even call it 64% return, since you put your money in over time, not all upfront (like a CD), so your average invested dollar is actually half. And, because of that 'lower of the two dates', you *will* do better on average.

Since we were limited to 10% of pay, I used to try to get people to let me loan them the money and split the profits. No takers.

And, if you want it guaranteed, you can, it will only cost you a bit in option premiums, or to tie up your money for a few days while you short an equal amount of stock in another account. I just let it ride for the three days, I figured the chance of it going up or down a bit was 50/50. Never amounted to much.

Oh, yes, in case you didn't get the idea: DO IT! Borrow the money if you need to - you won't be paying 64%, or even 32%.

-ERD50

 

[runchman]

Absolutely, YES, DO IT!!!!


I used to scream at my co-workers to do it. I couldn't believe that people were willing to turn down 'free money'.

They're probably the same ones not taking advantage of the full 401(k) employer match. For us money-savvy individuals it is truly inconceivable, isn't it??

- John

 

[Cut-Throat]

If you plan to sell the shares immediately, there is no risk and that is the best way to do it. Also, the minimum annual yield is 30% (15% twice a year). And you get the minimum 30% annual on the total amount they deduct from your check during the six month period but you get to have the money taken out of your check over the six months! So sweet...... !!

There is no risk....no need to hedge. Just sell immediately.
The minimum yield is 30% annualized. (15% twice a year)
You get the yield on the total amount contributed for the period, but get to contribute it slowly over the period.
If the stock is volatile, some periods you will get well over the minimum!

So sweet........

BTW, did I mention I liked the plan and miss it now that I'm RE?

I think the yield is 15% total. Remember you are paying in 2 periods, so yes you are getting 15% twice, but you had to pony up another Chunk of cash for the second 15% - So it's 15% yield on the total amount.

 

[brewer12345]

I'd crank that mother up to the max that was allowed and flip the stock immediately every 6 months.

 

[ERD50]

I think the yield is 15% total. Remember you are paying in 2 periods, so yes you are getting 15% twice, but you had to pony up another Chunk of cash for the second 15% - So it's 15% yield on the total amount.

No, it is even better than that.

First, a 15% discount means you buy at .85 sell at 1.00. 1.00/.85= 17.6% gain.

That is an absolute gain, not an annualized gain. So, you do it the first 6 months and get 17.6% on your money, and then again the second 6 months, and you made 35.3%. Technically, you could also say that yo can take your profits from the first 6 month period and make another bit at money market rates (if you maxed out, you can't plow any more into it).

Think of it as a 6 month CD that sold at a 15% discount. 17.6% gain. Do it twice sequentially in a year and you make 35.3%.

Second, about half the time, you can expect that a stock rise means you make even more (you get the lower of the start/end dates).

Third, you can double both of those numbers. Because you deposit the monthly evenly with each paycheck over the 6 months. So, on average, you really only have half the money in the account, zero at the start, the full amount only for the last pay period. So, roughly 70% annualized - more if the stock moves up.

None of that means you get any more money, but the numbers are impressive. If you can put 10K into it, you make $3,520 profit, minimum.

It's a gift - take it!

-ERD50