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Personal Finance Question - Employee Stock Purchase (1 Viewer)

The Z Machine

The Z Machine

Footballguy
I work for a large, multi-national corporation.  One of the benefits they give me here is the Employee Stock Purchase Plan.  I can choose to buy company stock at a discounted rate (locked in at the start of every year) via post-tax withholding from my paycheck.  I currently buy 1 share per monthly pay period and contribute far more to my 401k.

Over the course of the year, my company has seen a fairly sizable rise in stock price.  The current stock price is $165 and I can purchase stock at a discounted rate of $105.  I am prevented from selling shares from one year from the date of purchase.

At this point, it seems like a great opportunity to get a fairly significant return.  The only risk is if the stock price drops below $105 at the time I want to sell the shares.  How do I go about evaluating the risk of the price dropping below $105?

 
Our company is in similar situation.  You purchase at the locked in rate from 6 months ago and any purchases in 2nd half of year are at that locked July price even if stock declines.  The risk of price dropping below the discounted price is a company by company situation.  I don't think there is a magic answer, but at a 50% return if price stays the same, I'd take my chances there rather than the stock market.   Our company allows a one time change in contribution and I amped mine up a month ago.  Hurts my take-home pay now, but hopefully is worth it in January. 

 
I'd think you can also voluntarily withdraw from the plan at any time. Even if you can't, your risk isn't really that it drops below that $105 price. Your risk is that it drops below a price that wipes out the gains you made at $165 or whatever high price it stays at.

Trying to calculate the risk any further involves guesswork based on your company's situation. 

 
RUSF18 said:
I'd think you can also voluntarily withdraw from the plan at any time. Even if you can't, your risk isn't really that it drops below that $105 price. Your risk is that it drops below a price that wipes out the gains you made at $165 or whatever high price it stays at.

Trying to calculate the risk any further involves guesswork based on your company's situation. 
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He's buying at 105.  If stock price is above 105 a year from now, he's ahead. If it's below, he's lost money. 

For most of these plans, you can stop contributing, but any money put in will be buying stock at $105 price. 

 
Can you hedge with options outside of your ESPP?  I don't know the legalities of ESPPs, don't see them too often.

 
Ah I missed the block on sale part. Obviously that makes sense. My plan is just a general 15% discount to market price. 

 
Steve Tasker said:
Can you hedge with options outside of your ESPP?  I don't know the legalities of ESPPs, don't see them too often.
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Literally came here to ask this same question.  If you can legally buy put options to sell your ESPP shares at a certain price, you may be able to buy them at a price point where you profit either way.  Not sure the legality though.

 
Yeah, that's a mighty big drop. I'd buy and not worry about it.

And you're doing good by putting most of your money in your 401k. You hear these horror stories sometimes of people with all their retirement savings tied up in their company stock.....such a gamble. 

 
Fat Nick said:
Literally came here to ask this same question.  If you can legally buy put options to sell your ESPP shares at a certain price, you may be able to buy them at a price point where you profit either way.  Not sure the legality though.
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Not necessarily an issue of legality, but a contractual one.  Most (maybe all) ESPPs I’ve worked with had a prohibition on doing this.

 
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The Z Machine said:
I work for a large, multi-national corporation.  One of the benefits they give me here is the Employee Stock Purchase Plan.  I can choose to buy company stock at a discounted rate (locked in at the start of every year) via post-tax withholding from my paycheck.  I currently buy 1 share per monthly pay period and contribute far more to my 401k.

Over the course of the year, my company has seen a fairly sizable rise in stock price.  The current stock price is $165 and I can purchase stock at a discounted rate of $105.  I am prevented from selling shares from one year from the date of purchase.

At this point, it seems like a great opportunity to get a fairly significant return.  The only risk is if the stock price drops below $105 at the time I want to sell the shares.  How do I go about evaluating the risk of the price dropping below $105?
Click to expand...
Your risk reward parameters are pretty sweet.  Even if you can't option away your risk on your particular stock you may well be able to legally/contractually do the same against an index that correlates highly to your company.  Just a  :stirspot: thought.

RUSF18 said:
Ah I missed the block on sale part. Obviously that makes sense. My plan is just a general 15% discount to market price. 
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I'd buy and immediately sell for the 15%.  :moneybag:

 
It's worth the risk IMO if you have confid ce in your company. We buy ours quarterly at 15% less than the lowest amount it traded at for that quarter and we do have to hold it a year before we can sell. Yes, you run a slight risk, but it's a better bet than maxing out your 401k if your company is worth a darn. I max both out. Just sold some employee stock purchase stock the other day. Bought it $57 last year and sold it at $92. 

I'd do it for sure if it's a solid company.

 
Brony said:
He's buying at 105.  If stock price is above 105 a year from now, he's ahead. If it's below, he's lost money. 

For most of these plans, you can stop contributing, but any money put in will be buying stock at $105 price. 
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This is exactly correct.

 
T J said:
It's worth the risk IMO if you have confid ce in your company. We buy ours quarterly at 15% less than the lowest amount it traded at for that quarter and we do have to hold it a year before we can sell. Yes, you run a slight risk, but it's a better bet than maxing out your 401k if your company is worth a darn. I max both out. Just sold some employee stock purchase stock the other day. Bought it $57 last year and sold it at $92. 

I'd do it for sure if it's a solid company.
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It's a Fortune 500 company with $11B annual revenue (last year) and 5+% organic growth and $7+ EPS.

 
Fat Nick said:
Steve Tasker said:
Can you hedge with options outside of your ESPP?  I don't know the legalities of ESPPs, don't see them too often.
Click to expand...
Literally came here to ask this same question.  If you can legally buy put options to sell your ESPP shares at a certain price, you may be able to buy them at a price point where you profit either way.  Not sure the legality though.
Click to expand...
Exactly the question Z needs to find the answer to.

 
Brony said:
He's buying at 105.  If stock price is above 105 a year from now, he's ahead. If it's below, he's lost money. 

For most of these plans, you can stop contributing, but any money put in will be buying stock at $105 price. 
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Actually, he is paying taxes on that $60 delta so the stock can be over $105 and he'd still be in the red.

 
I will buy in for whatever you don’t. You get a cut for carrying cost

yes I am serious, PM if you wanna move forward 

 
I doubt you can farm out the shares you purchase.  Don't invest more than you can afford to lose.

Helpful tips from Fidelity.  (most notably, the tax implications)

I'd go for it, especially if your company is in an area that is not too volatile.  Oil and gas can be pretty brutal.

 
HellToupee said:
If the price drops below $105 don’t you get the discounted rate from there?
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He's not talking about this year.  He's talking about some hypothetical future date when he will sell the stock.

So he's basically asking us to be stock market predictors. 

 
When I worked for a place that did this, we were allowed to cash back out if the stock was below the purchase price at the end of the year.  Can you do that, or are you just worried about stock prices dropping during your prohibited sale year?

 
I cannot can back out at zero of the sick drops below purchase price.

After talking it over with my  wife, we'll be sinking 2/3rds of a month's salary into company stock.

 
The Z Machine said:
I cannot can back out at zero of the sick drops below purchase price.

After talking it over with my  wife, we'll be sinking 2/3rds of a month's salary into company stock.
Click to expand...
You better be damn confident in your company. If you sell yearly what is the actual profit after fees on the hypothetical $60 profit?

I guess for retirement accounts, I like to play it safer with index funds. 

 
Lol at $60 profit. That’s one way to put it 

another is buying stock at ~30% discount (factoring in taxes). That is huge. Let’s say you go in for 10 racks, that is $3000 profit after one year. Nothing to sneeze at 

 
wilked said:
Lol at $60 profit. That’s one way to put it 

another is buying stock at ~30% discount (factoring in taxes). That is huge. Let’s say you go in for 10 racks, that is $3000 profit after one year. Nothing to sneeze at 
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So how much take home is that after fees?

 
My company has a 15% ESPP discount.  I buy the max allowed $25,000/year.  And sell after the minimum holding period (3 months).  Absent any movement I make around $4,000/year playing that game.  I have been doing that 2-3 years now and not lost money any of those time periods.  I'd suggest buying the max allowed by law.  IRS limits are 25K/year (stock value not money put in).  Your company might have a lower limit.  This is almost risk free money if you sell it as fast as possible.  It will be taxed as ordinary income but who cares?

PS you can hold it longer (2 years I think) and get LTCG treatment but I don't personally because it ups your risk.

 
In case you aren't math inclined IRS limits will be around 25,000/165 (total number of shares you can buy).  You won't know exactly how many you can get since it will be at date of option not date you send money.  Break that number into 26 or so if you're paid bye weekly and that's the max you should put any pay period starting 2018.  Obviously you have no real limits in 2017 if you haven't bought a lot so far.

Your company might have lower limits (research).  If they are worth a damn they won't let you buy more than the limit.  I think you'd just lose the discount on any amount over the limit.

 
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In general, people need to take advantage of these kinds of things more.  It's the closest thing to free money there is for stable companies.  My company spun off of a larger, industry-leading company a few years back.  We were given the chance to buy IPO stock at issue price.  I was shocked that even the higher-level execs only bought a little bit.  I went all in, and my investment has basically paid for my current car and my wife's next car without touching the original investment.  

 
Been doing stock purchase with my company for almost 20 years now - an absolute no brainer imo.

Leveled and rebuilt my house with just stock $$$ and still have plenty stock left.

I max whatever they offer me.

 
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