1

My company gives us a discount of 15% when we buy its shares. Should I ignore that discount and invest in a range of companies to reduce my risk? Or should I invest major chunk of money in the company shares? This gives me a gain of 15%.

Past is not an indicator of future growth but over past 5 years the stock price has tripled.

6
  • 3
    A third option is to take the discount but as soon as the shares are in your brokerage account, sell them and buy whatever you would have otherwise invested in (or anything else you might want to buy). That gives you the discount with minimal risk. I don't think this is really an answer so I'll leave it here as a comment. Apr 29, 2020 at 1:24
  • That is an option. Thanks. There will be some tax implications. I think I have to work on those numbers. The thing is that it is difficult for me to pick market winners who return more than 15% and put the money there. Also given the common wisdom that person investing in individual stocks rather than ETF loses money is making it more difficult.
    – NotAgain
    Apr 29, 2020 at 1:58
  • 1
    Is there a time restriction before you can sell your shares or are you free to do so immediately? Apr 29, 2020 at 3:07
  • 1
    @BobBaerker I can do it immediately but then pay capital gain tax on the profit. If I hold for a year then tax on only half of the capital gain. The issue here is that the company is not a start up. It is a old blue chip company with very good record till now. Those who held it over 10+ years have done really well.
    – NotAgain
    Apr 29, 2020 at 3:20
  • 2
    A 15% discount is superb and you won't have many years when the market exceeds that. Buy all that you can eat. What you have to decide is whether you want to be an investor or whether you want the bird in hand. Apr 29, 2020 at 3:33

2 Answers 2

1

A good rule of thumb is to never turn down free investing money - this often means you should get your employer's full 401k match even if it means investing more money than you otherwise would. In this case, it means suggests getting as much stock as you are able at a discount.

However there is a higher-than-average risk here, for two reasons: firstly, unless you already have a very diversified investment portfolio, investing in individual stocks is quite high risk. Secondly, investing in the company you work for means if the company goes through tough times, potential for layoffs happens at the same time as a decrease in your investment portfolio.

Whether the risk is worth it will depend on how diversified you are generally, but at the same time, the immediate discount would be tough to give up.

1
  • Indeed. And if I invest whatever I can into company stocks then there is not much left at the end of the month to invest in other stocks.
    – NotAgain
    Apr 29, 2020 at 3:22
1

A good rule of thumb is to minimize investment in the company your work for unless you're a key decision maker (think C-Suite) whose holdings are expected and watched by the market as a sign of confidence in the company.

Ordinarily, I would suggest avoiding investing in a company one works for as it represents a high concentration of risk. However, your scenario also presents a free money component that is hard to walk away from.

You've indicated in the comments to your question that there is no required holding period and you can turn around and immediately sell the stock incurring capital gains tax. From a pure financial return optimization perspective, you should buy as much as you possibly can.

Lets look at an example. You have $850,000 sitting in the bank right now...what can you do with it?

Option 1 - Make a long term (buy and hold) investment in your employer, taking advantage of the 15% discount

Option 2 - You don't want to concentrate your risk, so you buy stock in some other company or maybe a broad market index ETF

Option 3 - You engage in some rapid arbitrage. Your company's stock is trading at $100/share, so you buy 10,000 shares at $85/share since you are eligible for a 15% discount. Immediately these share are in your possession, you sell them for $100/share (lets assume the price hasn't moved) for a gross profit of $150,000. Since you held for less than a year, you now owe short-term capital gains tax on that $150k i.e. taxed as ordinary income. For simplicity sake, lets assume its 33.3%, so you put aside $50k for the tax man and walk away with approx $100k in net gains (after all transaction cost and any price slippage between purchase and sale are accounted for)

Option 4 - You replicate Option 3 above, but instead of using only your 850k, you borrow an additional $7,650,000 to bring your total capital up to $8.5 million. Your gross profit becomes $1,500,000, capital gains of $500k and and approx net of $1 million. You should also have minimal interest rate charges since the entire transaction cycle should be about a few weeks to a month (?)

Note: Option 4 is likely not feasible if there is a limit on how much a single employee can buy, or if your employer has visibility into your trading activity on the company's stock. If company culture prefers/promotes buy and hold, such trading activities (options 3 and 4) might be viewed unfavorably and have implications that outweigh making a quick profit.

2
  • That is way too much money. They allow us to buy shares worth 30K only or less per year.
    – NotAgain
    Apr 30, 2020 at 0:01
  • I figured. The large numbers were mainly for illustration, but the economics/considerations remain the same.
    – WittyID
    Apr 30, 2020 at 0:07

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .