8

My employer offers an ESPP with the following details:

  • 15% discount
  • Max contribution is 15% of base salary
  • Purchase transaction occurs on the last business day of the month
  • Transaction settles 3 days after purchase
  • No obligation to hold the stock for minimum duration
  • No restrictions on sell timing (except during earnings lock-out period)
  • Brokerage fees
    • $0.05 per share sold (approximately 0.08% of the stock price today)
    • $0 per share bought

Given these parameters...

What is the safest way to play the ESPP?

What is (likely) the most lucrative way to play the ESPP?

Assume I contribute the maximum amount allowable. Assume I can hold the stock for up to you year before I may need to cash it out.

  • Does the purchase occur every month? "Purchase transaction occurs on the last business day of the month" I want to be sure I read this quote correctly. – JoeTaxpayer Jun 26 '16 at 19:46
  • Yes, it occurs every month. We can change our election at any time. – Sam Jun 27 '16 at 13:57
  • Does the plan have a "lookback provision" where the purchase price (before discount) is the lower of the starting or ending fair market value? – stannius Jun 29 '16 at 19:55
  • I don't believe it does. – Sam Jun 30 '16 at 21:09
4

A 15% discount is a 17.6% return. (100/85 = 1.176). For a holding period that's an average 15.5 days, a half month. It would be silly to compound this over a year as the numbers are limited.

The safest way to do this is to sell the day you are permitted. In effect, you are betting, 12 times a year, that the stock won't drop 15% in 3 days. You can pull data going back decades, or as long as your company has been public, and run a spreadsheet to see how many times, if at all, the stock has seen this kind of volatility over 3 day periods. Even for volatile stocks, a 15% move is pretty large, you're likely to find your stock doing this less than once per year. It's also safest to not accumulate too many shares of your company for multiple reasons, having to do with risk spreading, diversification, etc.

2 additional points -

the Brexit just caused the S&P to drop 4% over the last 3 days trading. This was a major world event, but, on average we are down 4%. One would have to be very unlucky to have their stock drop 15% over the specific 3 days we are discussing.

The dollars at risk are minimal. Say you make $120K/yr. $10K/month. 15% of this is $1500 and you are buying $1765 worth of stock. The gains, on average are expected to be $265/mo. Doesn't seem like too much, but it's $3180 over a years' time. $3180 in profit for a maximum $1500 at risk at any month's cycle.

  • There is an IRS limit on ESPP plans of $25k of purchased stock (before the discount) per year. This doesn't change your example, but it does mean the maximum gain is $3750 at an income of $141,667. – stannius Jun 29 '16 at 19:49
  • 1
    A good fact to add. For those above that level, they might wish to stay below the 15% to have their risk spread across the 12 months. – JoeTaxpayer Jun 29 '16 at 19:54
2

Short answer is to put the max 15% contribution into your ESPP.

Long answer is that since you want to be saving as much as you can anyway, this is a great way to force you to do it, and pick up at least a 15% return every six months (or however often your plan makes a purchase). I say at least because sometimes an ESPP will give you the lower of the beginning or end period stock price, and then a 15% discount off of that (but check the details of your plan). If you feel like your company's stock is a good long term investment, then hold onto the shares when purchased. Otherwise sell as soon as you get them, and bank that 15% return.

-3

A 15% discount does not necessarily mean it is a good investment. The stock price can go down at any point. 15% discount might mean you are getting a little better deal than the average cat.

  • 1
    What percent is the average tabby making each month? – JoeTaxpayer Jun 27 '16 at 22:56

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