Email: What to do about employer-sponsored stock purchase?

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My friend works in a fancy New York consulting company and wrote me this the other day. She was asking about employer-sponsored stock-purchase plans, which are basically when your employer lets you buy their stock for a discount. It was a calm morning until I read this email and started throwing things around my room in disgust.

To: Ramit Sethi [ramit@stanford.edu]

From: KF, Big Consulting Company

Hey–

So here is the quandary I’m in…

I do a stock purchase plan with [BIG COMPANY NAME], and it automatically purchases us stock every 6 months. We are all allowed to sell the same day (that day being today for the Nov-May period). One of the managers here just went all frantic and called the broker to sell her stock, saying that if you wait too long on the first day the price goes down because so many employees sell on the first day. I didn’t ask her what has happened in the past in the week or two or so after the purchase date. So there are 4 ways I see to approach this, and I’m not sure what to do:
1) Try to beat everyone (or most) to the punch and sell before the stock goes down (if it in fact does)
2) Wait a couple weeks or a month for the stock to rebalance itself after people buy the deflated stock.
3) Don’t sell for the foreseeable future because you either a) have confidence that [company] is doing well or b) have loyalty to the company you work for.
4) Don’t be a part of the stock plan at all because all this mess at the end possibly means you lose the monetary benefit of buying it in the first place.

I hope this makes sense. So far the stock is still up $.01 today. What do you think? Do I make any sense at all?

KF

Ok, before I show you what I wrote to her, think about what you’d say. Which of her options sound right? Or do none of them sound right?


To: KF, Big Consulting Company

From: Ramit Sethi

This is absolutely moronic. Let me be direct.

Never, ever make decisions based on what you think a bunch of other people are going to do–WHEN THERE ARE ONLY A FEW THOUSAND OTHER PEOPLE DOING IT. [Company name] is a HUGE company. It has millions of shares of stock. A few dumb employees selling it is not going to make a big deal.

Now there are a few stupid things about your manager:
-She has a broker. Why not do it herself?
-She sold it on the first day, incurring huge taxes. If you sell your purchased stock in under a year, you’re going to pay income-tax rates (~ 35%). If you wait over a year, your taxes are only 5 or 15%. THAT IS A HUGE DIFFERENCE–MUCH, MUCH BIGGER THAN the 1 or 2% DIP ON THAT DAY.
-My bet is if your manager actually did an analysis instead of going on her intuition, she would see something like this: Yes, perhaps the stock dips 0.5% or something that day–in SMALL part due to some employees selling it. But over the next 2, 3, 6, 12, 24 months, there is no correlation between the long-term performance of [company] stock and the November-day selling.

Stocks are not about short-term selling–even if you have a 15% employee discount. If you think the stock is a good investment for the long-term, hold it and you’ll make much, much more money. (So I like your #3 best, but it’s about the stock being a good investment, not loyalty. Keep this objective.) One important note to keep in mind is that people tend to buy too much of their own company’s stock for a variety of reasons (discounts, they know the company, it’s easy, etc). Remember to diversify. If, for example, your company had a horrible few quarters, the stock would go down AND you might lose your job.

Also, tell your manager that I am going to punch her in the face.

-Ramit

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7 Comments

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  1. While I agree with your long-term buy and hold if it’s a good company investing style, I would advise your friend to buy and dump the shares immediately. Assuming your friend knows nothing about investing (which s/he appears to be), she could still profit handsomely at about 11% after deducting 35% tax. The 11% is guaranteed profit (aka free money). She can later take her money + 11% and invest in some other stocks if she wishes. But if she knows nothing about stocks, she should still take advantage of her ESPP because otherwise it’ll be like leaving free money on the table for her employer.

  2. By buying (and holding) your own company’s stock, you’re concentrating your investments (your job + your portfolio) in a single company. This is not good from a diversification point of view. (Think about the Enron staff.)

  3. I realize I’m reading this a lot later than the publish date, but I have this to say: I don’t have enough money to make a long term investment, but I could buy stock and sell 6 weeks later and get free money, even if it’s taxed at a really high rate. Is that better than doing nothing at all?

  4. What do you mean, you don’t have enough money to make a long-term investment? That doesn’t make sense to me. If you have enough to invest, to be “long-term,” you just think and act long-term.

  5. so in general, is it good to sell stocks immediately or wait?

  6. In general, it is best to contribute up to the max (usually 10-15% of your income up to 25k) in your companies ESPP. The exception is if the company is tanking. If you know the company is closing shop, you may not want to buy their stock, even at a discount. Even if this is the case, you can usually pull your money out of the plan before the purchase, understanding that you may be disqualified from the plan until the next round.

    Most plans have a “lookback” feature that allow you to get your 15% off the LOWER of the price of the stock at the beginning of the window and the end. So, if the stock was at 10$ at the beginning of the round and 15$ at the end (on purchase day), you will get your stock at 15% off 10$ per share. This means that even if the stock is falling or staying even, you are making money because of your lookback and discount.

    Now: To sell immediately or to hold?

    Selling immediately is fine. It’s certainly better than not contributing at all. Just know that it isn’t the BEST option. You will pay regular income tax on any money you make…so it’s really just like getting a bonus check. It isn’t the end of the world.
    BUT (and thats a BIG BUT!) if you can hold onto your stock for 12-18 months (depens on the plan), you will only pay regular income tax on a portion of the money you make when you sell. The rest you only pay long term capital gains taxes on. This means more money for you and less for the government AND it shows that you are a bit more savvy than the above manager by allowing your money to work for you in the long term.

    There is a lot more to it…I suggest googling for “Survey Findings: Employee Stock Purchase Plans” and reading that report if you have more questions.

    -Ryan