My US employer offers stocks for employees with a certain discount up to a max limit per year. What are the advantages and disadvantages of buying these stocks?

Later edit:

The employer is Microsoft

  • If you were willing to tell us the employer in question, we might be able to look up the stock plan prospectus in the company's SEC filings and pick it apart for you.
    – user296
    Commented Nov 16, 2011 at 21:08
  • fennec, I added some extra info
    – Andrew J
    Commented Nov 17, 2011 at 7:39

5 Answers 5


The typical deal is you can put 10% of your gross pay into the ESPP. The purchase will occur on the last deposit date, usually a 6 month period, at a 15% discount to the market price.

So, the math is something like this: Your return if sold the day it's purchased is not 15%, it's 100/85 or 17.6%. Minor nitpick on my part, I suppose. Also the return is not a 6 month return, as the weekly or bi-weekly deductions are the average between the oldest (6 mo) and the most recent (uh, zero time, maybe a week.) This is closer to 3 months. The annualized rate is actually pretty meaningless since you don't have 4 opportunities to achieve this return, it's important only if the cash flow hit causes you to borrow to support the ESPP purchases.

The risk is whether the stock drops the 15% before you can execute the sell to take advantage of the gain.

Of course the return is gross, you need to net for taxes.

Edit to respond to comment below - When I said meaningless, I meant that you can't take the 17.6%, annualize it to 91.2% per year and think your $1000 will compound to $1912. It's as meaningless as when an investor gets a 10% gain on a stock in one day, and (with 250 trading days per year) decides his $1000 will be worth $2 quadrillion dollars after a year. The 17.6% is significant in that it's available twice per year, for a true 38% return over a year, but if borrowing to help the cash flow, that rate is really over 3 months.

  • 1
    The APR is not meaningless unless you know of a CD that allows me to put in a small biweekly contribution and return an APR ~90%. The point being calculating the APR is important when comparing different investment opportunities.
    – Pablitorun
    Commented Nov 20, 2011 at 19:27

It would be difficult to answer without knowing specifics about a particular offer.
In certain cases, it's definitely great and one could become a millionaire [Google for example]. In other cases one could lose money. In most cases one makes a decent return.
As the specifics are not available, in general look out for:

  • Is the stock already listed? This makes it easier to evaluate the price than something that is not yet listed.
  • Amount of discount. The greater the better.
  • The vesting period if any. Great if none, some ESPP one is allowed to sell only after a holding period.
  • Treatment to your holding, if you leave the company, if they still belong to you it's great, or have to be sold back to the company or you lose it, then watch out.
  • If it's already listed, and you are buying through the year, a discount is on an average price or the price when you are wanting to buy.
  • Tax treatment of the discount, will it be shown as benefits paid.

Most of these would determine if the plan is good for you to get into.

  • Most stock plans are pretty safe to participate in if you can sell the stock immediately or close to it. However, it's probably a bad idea to hold on to the company stock for significant amounts of time. You already have a significant amount of exposure to risk from working there: if they do poorly, you could lose your job. Would you also like to lose a good chunk of your money as well? Bad plan. Diversify.
    – user296
    Commented Nov 16, 2011 at 21:16

Advantage: more money. The financial tradeoff is usually to your benefit:

  1. Deposit some portion of your paycheck into the ESPP account (say 15%).
  2. Each vesting period (say 3 months), you get stock at a discount (say 10%).

Given these, for having your money locked up for the average length of the vesting periods (some is locked up for 3 months, some is locked up for nearly 0), you get a 10% return. Overall, it's like a 1.5% bonus for the year, assuming you were to sell everything right away.

Of course, whether or not you wish to keep the stock depends on how you value MSFT as an investment.

The disadvantage lies in a couple parts:

  1. If you think you can beat the 10% (nearly) guaranteed return, then having your money locked up for up to 3 months can be limiting. (Not an issue for most people.)
  2. When the ESPP cycle vests, there is a couple days until you actually acquire the stock. During that time, the price might also slip, cutting into your 10%. Note: the odds of the stock slipping 10% in the couple days from when you get it isn't too bad, but it does hurt psychologically to see the stock fall in the couple days until you actually get it, even if you are still making a profit.
  3. If you do decide to hold the stock, and it goes down sufficiently, you run the risk of triggering a Wash Sale, which is a bunch of paperwork when doing your taxes. Because of the 3-month cycle (for MSFT), there's only about a 1-month window between vest cycles where you can sell at a loss without triggering a wash sale (or thinking the other way, there's a 2 month window where you might trigger it).
  • Yeah agree Jimmy - generally free money, barring the cost of doing the tax accounting. Watching the calendar very carefully is critical, wash-day sales can really bite into that cash. Create a calendar in Outlook to track your vesting schedule and blackout wash-day risk periods from vesting of Signing Stock, Gold-star Awards, Tenure Awards, Bonuses etc.
    – stephbu
    Commented Nov 20, 2011 at 11:00

You should always always enroll in an espp if there is no lockup period and you can finance the contributions at a non-onerous rate. You should also always always sell it right away regardless of your feelings for the company. If you feel you must hold company stock to be a good employee buy some in your 401k which has additional advantages for company stock. (Gains treated as gains and not income on distribution.)

If you can't contribute at first, do as much as you can and use your results from the previous offering period to finance a greater contribution the next period. I slowly went from 4% to 10% over 6 offering periods at my plan.

The actual apr on a 15% discount plan is ~90% if you are able to sell right when the shares are priced. (Usually not the case, but the risk is small, there usually is a day or two administrative lockup (getting the shares into your account)) even for ESPP's that have no official lockup period.

see here for details on the calculation.


Just a note For your reference I worked for Motorola for 10 years. A stock that fell pretty dramatically over those 10 years and I always made money on the ESPP and more than once doubled my money.

One additional note....Be aware of tax treatment on espp. Specifically be aware that plans generally withhold income tax on gains over the purchase price automatically. I didn't realize this for a couple of years and double taxed myself on those gains. Fortunately I found out my error in time to refile and get the money back, but it was a headache.


The answer is simple. If your employer is offering you a discount, that is free money. You always take free money, always.

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