How much percent of my salary should I use to invest in company stock?

Question

My company allows me to purchase stock at 90% of the closing fair market value. My salary is in the 90k-100k range. I am allowed to put in anywhere from 1-15% of my paycheck in company stock up to a max of 25,000$. I have just begun employment at this company and my age is in the lower 20s. Since I just started out and I am single with no dependents (for at least 2 more years), it seems like I have more money on hand than I will have in the future. What approximate percentage of pay should I invest?

EDIT: I am referring to ESPP, the company is in the US, is publicly traded and the stock is known for being quite stable.

Answer 1

You're talking about ESPP? For ESPP it makes sense to utilize the most the company allows, i.e.: in your case - 15% of the paycheck (if you can afford deferring that much, I assume you can). When the stocks are purchased, I would sell them immediately, not hold. This way you have ~10% premium as your income (pretty much guaranteed, unless the stock falls significantly on the very same day), and almost no exposure. This sums up to be a nice 1.5% yearly guaranteed bonus, on top of any other compensation.

As to keeping the stocks, this depends on how much you believe in your company and expect the stocks to appreciate. Being employed and dependent on the company with your salary, I'd avoid investing in your company, as you're invested in it deeply as it is.

Answer 2

I would not hold any company stock for the company that provides your income. This is a too many eggs in one basket kind of problem.

With a discounted stock purchase plan, I would buy the shares at a 10% discount and immediately resell for a profit. If the company prevents you from immediately reselling, I don't know if I would invest.

The risk is too great that you'll see your job lost and your 401k/investments emptied due to a single cause.

Answer 3

One such strategy I have heard for those who have this opportunity is to purchase the maximum allowed. When the window to sell opens, sell all of your shares and repurchase the most you can with the amount you gained (or keep an equivalent to avoid another transaction fee). This allows you to buy at a discount, and spread out the risk by investing elsewhere. This way you are really only exposing yourself to lose money which you wouldn't have had access to without the stock discount.

Answer 4

Does your company offer a 401k? or similar pre-tax retirement plans?

Is your company a publicly traded company?

These questions are important, basically the key to any of your investments should be diversification. This means buying more than one kind of investment, amongst stock(s), bonds, real estate or more.

The answer to "How Much" of your salary should go to company stock, is subjective. I personally would contribute the max toward a retirement plan or even post-tax savings, which would be invested in a variety of public companies.

Hope that helps.

Answer 5

What most respondents are forgetting, is when a company allows its employees to purchase its shares at a discount with their salary, the employee is usually required to hold the stock for a number of years before they can sell them.

The reason the company is allowing or promoting its employees to purchase its shares at a discount is to give the employees a sense of ownership of the company. Being a part owner in the company, the employee will want the company to succeed and will tend to be more productive.

If employees were allowed to purchase the shares at a discount and sell them straight away, it would defeat this purpose.

Your best option to decide whether or not to buy the shares is to work out if the investment is a good one as per any other investment you would undertake, i.e. determine how the company is currently performing and what its future prospects are likely to be. Regarding what percentage of pay to purchase the shares with, if you do decide to buy them, you need to work that out based on your current and future budgetary needs and your savings plan for the future.

Answer 6

• I agree with the other comments that you should not buy/hold your company stock even if given at a discount. If equity is provided as part of the compensation package (Options/Restrictive Stock Units RSU)then this rule does not apply.

• As a matter of diversification, you should not have majority equity stake of other companies in the same sector (e.g. technology) as your employer. Asset allocation and diversification if done in the right way, takes care of the returns.

• Buying and selling on the same day is generally not allowed for ESPP.

• Taxation headaches.

This is from personal experience (Cisco Systems). I had options issued in Sept 2008 at 18$ which vested regularly. I exited at various points - 19$,20$,21$,23$ My friend held on to all of it hoping for 30$ is stuck. Options expire if you leave your employment. ESPP shares though remain.