My company recently finished another six month round of its Employee Stock Purchase Plan or ESPP. And I couldn’t be happier.
If you monitor the stock market, or hear news updates on the radio, you might be aware that the DOW recently had a 300 point sell off. Some Wall Street people refer to it as consolidation, whatever that means. Essentially, the market on average had a pull back. The DOW index fell 300 points. I noticed it in my stock options and other holdings.
So why am I excited about my ESPP? ESPPs are an almost guaranteed way to make a little bit of profit with a built in savings component. Every program is different, but the two that I have been through both involved setting aside a piece of every pay check over six months. At the end of the round, all the money is used to buy company stock at a discount. On the same day, you can immediately sell it at market value.
My current one basically buys a chunk of stock at a 15% discount. By turning around and selling immediately on the date you got it, you score an immediate gain on your money. In this case, you are buying stock at 85% of its current price. Inverting that shows a 17.6% immediate gain on the money you invested. My previous company’s ESPP actually picked the lowest price point over the six month period, and bought it at THAT price, discounted 15%. In one stretch, I saw a 25% total discount. Wow!
Hence, I would set aside as much as I could afford into the ESPP program.
BTW, this is only if you can sell on the same day you receive the stock. If you have to hold it for a month, a year, or more, then that’s something I’m not really interested in.
There is a convenient side effect. The money that is accumulated for the ESPP purchase round is a chunk of savings. In my eyes, I just got a big collection of money. The cost of the money was a good deal. But I now have enough to eye picking up either KO or BP, two of the stocks on my short list that are sporting cheap P/E ratios. That is also why I say “as much as you can afford”. The money you pour into an ESPP program is taken out of each paycheck. Can you do without it? If so, then it will grow nicely as shown above. And it will be available in big block when its handed back to you six months later.
What are the risks involved in an ESPP. Despite buying and selling stock on the same day with a 15% boost, there is a chance that the stock could drop more than that. In that situation, you would have lost money. There is also the risk that you will not pay attention, miss the date your stock purchase is made, and not execute your sell off. That’s why its called risk capital.
To me, the risk is minimal. In just a few days (I didn’t sell until three days after this latest round), I don’t really expect stocks to drop THAT much. But nothing is for certain.
And if you didn’t catch on, I only entertain ESPP programs with the intent to sell on the day its awarded. I really don’t think about holding onto the stock. But that’s because this stock is NOT on my short list of things I want to hold onto long term. You might have a different opinion.