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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.

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    Caution: The Worst Case Scenario is that when the company does poorly you are not only fired or face a pay cut, but the stock has lost money and yet you must sell to pay your bills...
    – Paul
    Sep 18, 2012 at 22:20
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    I think the worst case scenario also involves a company bankruptcy where you lose the cash you had been setting aside to buy stock on account of the statement in the prospectus saying that they can use that cash for business purposes even before they give you the stock (combined with your status as an unsecured creditor).
    – user296
    Sep 18, 2012 at 23:01
  • Country you are in? Rules mat differ from one to another.
    – JTP - Apologise to Monica ♦
    Sep 19, 2012 at 1:54

7 Answers 7

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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.

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  • If you're selling them immediately there shouldn't be any affordability problem since you'll be getting the resale money back almost immediately (give or take a day or three to xfer funds from your brokerage account). Being able to afford it or not seems like it should only be a concern if you're required to hold the shares for a non-trivial amount of time first.
    – Dan Is Fiddling By Firelight
    Sep 18, 2012 at 20:33
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    @Dan, well, that unless you live from paycheck to paycheck. Then putting 15% aside for half a year (or whatever the ESPP period is there) may be problematic.
    – littleadv
    Sep 18, 2012 at 20:34
  • An 11% return on an average 3 month holding period (for the twice yearly buy) is pretty compelling.
    – JTP - Apologise to Monica ♦
    Sep 18, 2012 at 22:23
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    Doesn't selling them immediately have tax ramifications versus holding them? I believe that the discounted amount is taxable if you sell within two years.
    – Kevin
    Sep 21, 2012 at 14:13
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    I do this with a significant portion of my income with success. Remember that you only get taxed on what you make. I'm not going to make less money to get taxed less.
    – C. Ross
    Oct 8, 2012 at 19:57
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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.

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  • Think about the folks who had Circuit City stock before it went out of business. Alex B is on point: "too many eggs in one basket."
    – Waddler
    May 15, 2014 at 22:35
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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.

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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.

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  • 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.

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    "Buying and selling on the same day is generally not allowed for ESPP" - since when???
    – littleadv
    Sep 25, 2012 at 0:17
  • Options are more related to RSU's than ESPP. Options and RSU's are given as an incentive by your employer, and have maturity (vesting) time usually measured in years. Exercising a vested option or RSU can be done on the day of vesting. ESPP is a plan in which the employee chooses to defer a certain part of his salary (on which he should decide at the beginning of the plan period) for the period of the plan (e.g. decide on December to defer 15% of pay throughout the following year). The company then uses this money to purchase shares for a reduced price at the end of the year. [cont...]
    – ysap
    Dec 1, 2013 at 23:06
  • These shares are similar, in every aspect, to shares the employee will buy on the stock exchange. Any gain made on the purchase price, relative to the actual price at the time of purchase, is regarded as salary, and is taxed as such.
    – ysap
    Dec 1, 2013 at 23:08
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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.

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    Victor may be confusing the favorable tax treatment that comes after two year of the start of the purchase period. Else, the discount is ordinary income (which I'll take.)
    – JTP - Apologise to Monica ♦
    Sep 19, 2012 at 0:50
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    @Victor, I'm not familiar with Australian specific, but it is hard to believe that ESPP equivalent in Australia has holding period. Why would a company let its employees buy shares at a 10% discount when they can just resell them on market and make a profit? - for that. Its a bonus, basically. The profit is taxed as salary, not capital income. De facto the employee gives the employer a short term loan (averaged 3 months period), and in return gets the 10% purchase premium. * Firstly it would be diluting its shares * - no new shares are issued, so no-one is diluted.
    – littleadv
    Sep 19, 2012 at 1:15
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    Thus my desire for user profiles to include country as mandatory, not optional.
    – JTP - Apologise to Monica ♦
    Sep 19, 2012 at 1:36
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    @Victor - that's RSU. Restricted Stock Units. Where's the quote coming from? What's CBA?
    – littleadv
    Sep 19, 2012 at 3:53
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    @Victor, this seems to be what we call RSU here in the US. What the OP described is a standard ESPP (the discount and the portion of the salary allowed to participate, as well as $25K worth of stock maximum are regulated by the IRS), and these are seldom restricted (I've never actually heard of a ESPP that results in restricted stocks in the US or anywhere else). I'm not sure if it is allowed to be restricted at all. In the US I don't think it can be restricted. The 25K limit suggests we're talking about US.
    – littleadv
    Sep 19, 2012 at 6:51
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There is Free employer money on both sides of the tax fence for some employees.

On the pretax side, your employer may provide you a match. If so, invest the maximum to get 100% of the match.

On the after tax side, many companies offers a 15% discount on ESPP plans and a one year hold. My wife has such an employer. The one year hold is fine because it allows us to be taxed at Long Term Capital gains if the stock goes up which is lower than our current income bracket. After creating a seasoned pool of stocks that we could sell after the one year hold, we are then able to sell the same number of stocks purchased each month. This provides a 17.6% guaranteed gain on a monthly basis. How much would you purchase if you had a guaranteed 17.6% return. Our answer is 15% (our maximum allowed).

The other trick is that while the employer is collecting the money, you will purchase the stock at the lowest day of the period. You will usually sell for even more than the purchase price unless the day purchased was the lowest day of month.

The trick is to reinvest the money in tax free investments to balance out the pretax investing. Never leave the money in the plan. That is too much risk.

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    "17.6% guaranteed gain on a monthly basis" ??? That equates to 211.2% p.a. Are you serious? Investing in the stock market is in no way guaranteed !
    – Victor
    May 15, 2014 at 22:02
  • @Victor is exactly right, andrew. Your ESPP allows you to purchase your company's stock at a discount, right? What happens if you purchase the stock at a 15% discount, and a year later, the stock is 20% lower? How are you managing this risk? How are you hedged if this happens? As your return increases, so does your risk. A 17.6% monthly return is extremely high, which means that by definition, your risk is extremely high as well.
    – John Bensin
    May 15, 2014 at 23:57

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