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What to do with your Employee Stock Purchase Plan (ESPP)

If you work for a publicly traded company, there is a good chance you have the opportunity to purchase company stock through an Employee Stock Purchase Plan (ESPP).  Should you participate?  If you do participate, when should you sell your shares?

Should you even participate in your Employee Stock Purchase Plan (ESPP)?  Probably.  With an ESPP, the company usually allows its employees to buy company stock at a discount, typically 15%.  A 15% discount is kind of like receiving free money.  And if there are no restrictions on when you can sell your ESPP stock, then there is little risk if you sell your shares almost immediately after purchase.  You’re basically just pocketing the 15% discount/gain (assuming the spread between your discounted purchase price and your sale price remains 15%).  So buying stock at a 15% discount is generally a pretty good deal, but it doesn't come without potential risks.  Before you participate in your company's ESPP, you should have a conversation with your financial advisor to discuss the opportunity and risk with your ESPP.

When can you sell your ESPP shares?  It depends.  With an ESPP, some companies allow employees to sell ESPP shares almost immediately after purchase, but not all.  Some companies place restrictions on when you can sell your shares.  Ask your company about any restrictions.  Find out when you are able to sell your shares.

When is the best time to sell your company stock?  Since nobody has a crystal ball, nobody can tell you with absolute certainty when the best time to sell your company stock is.  But that doesn't mean you can't make an informed decision about when to sell.  Read on.

What are the two main factors you should consider when deciding if you should sell your company stock?  Risk and taxes.  Concentration risk to be more specific.  Concentration risk should be your main concern.  Taxes should also play a role in your decision, but taxes should be a secondary factor to your concentration risk.

What is concentration risk and how much is too much? When you think of concentration risk, think of the saying, “Don’t put all your eggs in one basket”.  An investment in one individual stock is considered more risky than a diversified investment portfolio consisting of several stocks.  Most financial advisors, including myself, typically recommend investors have no more than 10-20% of their total investments in any one company.  This way, if that one company comes upon hard times, the investor is risking no more than 10-20% of their total investments on that one company.  Every person and situation is unique, so discuss this with your financial advisor before making any decisions.  (Note:  This applies to all stock, not just ESPP shares.  Don’t forget about the stock you have acquired in your 401k plan, maybe through your company’s matching contributions).

What about taxes?  With stock you have acquired through an ESPP, you generally have to pay ordinary income taxes on the discount you received when you made the purchase.  So if you received a 15% discount on the purchase of your ESPP shares, this 15% discount/gain will likely be taxed as ordinary income because it is generally considered additional compensation to you.  For any gains above and beyond the discount you received, you will generally need to hold your ESPP shares for over a year in order to receive the lower long-term capital gains tax rate.  But it can be more complex than that.  I'll let Intuit/TurboTax explain.  Here is a very helpful link:  ESPP Intuit/TurboTax Link (Click here)

Think your company’s stock is safe?  It might be, but you never know for sure.  Three names:  Enron, WorldCom, and Lehman Brothers.  Enron was once considered one of the largest and most stable energy/utility companies.  WorldCom was once considered one of the largest and most stable telecommunications companies.  Lehman Brothers was once one of the largest investment banks.  I'm sure most of the employees for these companies never dreamt their company would fall on hard times, let alone file for bankruptcy.  Company loyalty is good, but don't risk your life savings over it.

Take a lesson from your CEO:  Having confidence in your company is good, but remember, even some of the top executives at your company have probably sold shares.  Why do they sell company stock?  It probably has nothing to do with their lack of confidence in the company.  It's more likely because they want to lower their concentration risk and diversify their investments.  It's not illegal to sell your company stock, so don't feel guilty about doing it.  Top executives do it all the time.

HyLine Bottom Line:  Buying stock at a 15% discount is generally a pretty good deal.  It’s kind of like receiving free money.  But make sure you know and understand your concentration risk.  If you get too concentrated (over 10-20% of your total investments), you should consider selling shares.

What can I do at HyLine Wealth to help you sell your company stock?  Not much.  I can consult with you about your concentration risk.  But mainly, I can just pass along information to help you make your decision.  This tip is on me!  If you do sell stock in your company's ESPP and want help investing and diversifying the proceeds from your stock sale, I can certainly help you with that.

Want more investment "tips"?  We have a lot more great ideas and suggestions to help you be smarter with your money.  CLICK HERE to get these "tips".

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Questions?  Don’t hesitate to reach out.  If you have questions on anything, feel free to email me at brock@hylinewealth.com or call me at (605) 275-2343.

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Brock Hyde
Investment Adviser

HyLine Wealth
221 S Phillips Ave, Suite 207
Sioux Falls, SD 57104
Office (605) 275-2343

Location-Independent:  Pretty much wherever you are located, we can work together.  I am registered in the state of South Dakota and have an office in Sioux Falls.  The “de minimis exemption” allows me to do business in most other states (with only a few exceptions).  I consider myself "location-independent" as I use a heavy dose of technology to communicate and serve you.  This includes screen sharing technology, electronic signatures when possible, and shared client portals so we can view the same information at the same time.  Frankly, I can probably offer you better service than your "local" financial advisor.

HyLine Wealth is an investment advisor firm registered in the State of South Dakota. We do not provide tax or legal advice. Past performance is no guarantee of future results.  Always consult your financial advisor, tax advisor, attorney, and/or insurance agent before implementing any specific strategy to make sure it is right for you and your unique situation.  We are not responsible for the accuracy or upkeep of information on the links we provide to outside websites.  If/when we provide a link to an outside website, be sure to independently confirm the accuracy of any information.