Pros and cons of investing in (employers) company stocks
Many firms that seek to increase employee motivation and tenure use company stock options as a form of HR Retention strategy or even part of their benefits package. If you work for a publicly listed firm, then chances are that they will have a stock purchase plan or program that you can take advantage of.
I also consider this as one of the ‘Lazy Investing Strategies’ out there for beginners or employees to participate in their very first ‘investment.’
Typically, these incentives can be an Employee Stock Purchase Plan (ESPP) or an Employee Stock Ownership Plan (ESOP). Both options work differently, but their purpose is the same: to offer employees the opportunity to invest in company stock and share in the company's profits.
If you already work in an executive management position, your compensation will most likely be heavily concentrated in company stock. This is an incentive to pay managers more if the company performs well. And as an insider, your stock ownership is publicly reported by law as well.
Employee Stock Purchase Plans (ESPP) – employees have the ability to buy shares of their company's stock at a discounted price (usually 10-15 percent) based on the fair market value. Contributions to the plan are made through payroll deductions (that are customizable percentage contributions).
Sometimes, some employers offer matching contributions to the plan to allow employees to build their company stock portfolio faster (if you contribute 5 percent of your salary, the company also matches 5 percent).
Employee Stock Ownership Plans (ESOP) – offer a hands-off way for workers to own their company's stock. With this plan, the company buys shares on your behalf, but you pay nothing for this benefit. The stock is treated as part of your compensation package, which is similar to a profit-sharing plan.
You will have more control with the ESPP where you can easily buy and sell stocks, while ESOPs shares are held until you retire or leave the company, at which time the employer buys them back and distributes the gains.
Pros and Cons of Investing in your employer’s company stocks:
PROs
•Lesser costs and expenses – this includes your own money since you are already buying at a discount; and you don’t have to personally pay for broker fees as well.
•Simplified investing - You only have to buy one stock again and again through stock plans. It’s easy!
•High Profit potential - The value of your company's stock plan is tied to your employer's success. If you work for an established company with a lengthy track record of profitability, then being able to buy its stock at a discount or being granted shares can yield higher returns compared to purchasing stocks through a broker.
CONs
•Lack of Diversification - avoid putting most or all of their eggs into one basket. Ideally, company stock should make up only 10 percent-15 percent of your total portfolio.
•Higher Risks – Workers who invest in company stock need to realistically consider the possibility that their employers could go bankrupt at some point.
•Taxes – Stock options can make an employee a lot of money, but the tax issues are very complex as well.
Divide your portion into seven, or even eight parts, for you do not know what disaster may occur on the earth. – Ecclesiastes (11:2)
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The writer is an RFP® –Registered financial planner and helps people through CERTA, Inc.’s financial education programs, estate planning & investment advisory (www.certa.ph). He’s also a Real Estate Broker, author of the award-winning personal blog– www.vernongo.com; Vice Chair –www.cebucontentcreators.com
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