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My company offers an employee stock purchase plan with two 6 month periods. At the end of the period I buy the company stock at a 15% discount on the lower of the price at the start of the period and the price at the end of the period. There is a maximum on how much I can contribute per year.

I am Canadian and live in Canada, but the company is American so I contribute in USD. I sell as soon as possible after each period ends.

Is this a risk free investment? Am I guaranteed a 15% (before taxes) or more return?

  • I think so. It's essentially a form of convertible debt. You are lending the company part of your salary. According to this: canadiancapitalist.com/tax-treatment-of-espp-benefits it (your profit) is taxed as income. – Guy Sirton Jan 10 '15 at 2:38
  • Are the payments coming out of each paycheck or is it a lump done at the end of each 6 month period? I'd wonder about currency risk and specific stock risk as if the company goes under then you may not get such a big reward that if you want examples look at Enron and Worldcom from years ago. – JB King Jan 10 '15 at 3:34
  • The payments get deducted each paycheck. I'm not worried about the company going under, we're a large stable company. I'd be protected against the stock losing value since I get the discount on the price at the end of the period and I sell as soon as possible when the period ends. – Ben Steeves Jan 10 '15 at 4:49
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Your maximum risk is 100%.

If you buy the stock 15% off and your company goes bankrupt tomorrow, you've lost everything.

It also sounds like you have foreign exchange risk.

One can debate how much risk this is in terms of expected outcomes, but that was not your question.

However, if you purchase the company stock and buy put options at the same time, you can lock in a sale price ahead of time and absolutely limit your risk. Depending on the amount of stock we're talking about, you can buy currency futures as well to hedge the exchange risk. You don't necessarily have to buy the break-even strikes, you can buy the ones that guarantee a positive return. These are probably fairly cheap.

Note that a lot of companies have policies that prohibit beneficiaries from shorting the company stocks, in which case you might not be able to hedge yourself with put options.

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There would be small generic risk that the company stock goes down real fast by more than 15% in a specific event to the company [fraud, segment company operates suffers a shock, etc] or a generic event to the stock market like recent events of Greece etc.

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    That's true, so there is a small risk there. This would have to happen between the time the period ends and the time I sell the stock, usually 3 to 5 days, so the risk there should be low – Ben Steeves Jan 10 '15 at 4:59
  • @bs4754 - there are many companies who's shares have gone down 20% or more in one day! So if you don't know what you are doing, their is plenty of risk. – Victor Jan 10 '15 at 8:20
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    To add to this, often the period in which you are waiting to receive the stock so you can sell includes a company earnings report. 15% movements in share price in a day are rare, but probably a lot are due to bad earnings reports. – Craig W Jan 14 '15 at 18:29
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It's a risk free investment only if you have 100% warranty that you will be able to sell these stocks for a better price than what you've paid. And that's virtually impossible. I don't think there is any "risk free investment" when stocks are involved. You can try to minimize the risks and consider them low, but IMO it's dangerous.

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I don't know what restrictions are put on the average employee at your company. In my case, we were told we were not permitted to either short the stock, or to trade in it options.

That said, I was successful shorting the exact number of shares I'd be buying at the 6 month close, the same day the purchase price would be set. I then requested transfer of the stock purchase to my broker where the long and short netted to zero.

The return isn't 15%, it's 100/85 or 17.6% for an average 3 months they have your money. So do the math on APR. (Higher if the stock has risen over 6 months and you get the lower price from 6 months prior.)

My method was riskless, as far as I am concerned. I did this a dozen times. The stock itself was +/- 4% by the time the shares hit, so in the end it was an effort, mostly to sleep better. I agree with posts suggesting the non-zero risk of a 20% 4 day drop.

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