The employee stock purchase program (ESPP) at a US company provides the opportunity to purchase whole or fractional shares of a stock at a 5% discount, or 95% of the stock price at the close of the purchasing day. There are 12 pay-in periods per year, or once a month.
What are the financial benefits of buying into this program considering that the S&P 500 or some other comparable market indicator might grow 8% to 20% per year?
Other than the guaranteed 5% bonus (assuming you sell it right away), no benefits.
Keep in mind that the price from which the discount is calculated is not necessarily the market price at the date of the ESPP purchase, so the actual discount may be more than 5% (depending on the volatility of the stock - much more).
Make sure to check the language describing the 'discount'. The company may be matching your contribution by 5% instead of a discount. You will likely be taxed on the match as compensation and your benefit would net to less than 5%.
The next risk is that you've increased your exposure if your company does poorly. In the worst case scenario you could lose your wages to a layoff and your portfolio to a falling share price. Investing in other companies will diversify this risk.
As for benefits, you get the 5% (less taxes) for free which isn't a bad thing in my book. Just don't put everything you own into the stock. It should be part of your overall investing strategy.
