Spouse can buy company's stock at 15% off the price on 12/31

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Southtonorth
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Spouse can buy company's stock at 15% off the price on 12/31

Post by Southtonorth »

Spouse works for a Fortune 500 company. The company offers employees stocks at 15% off. However, the 15% off price is based on the last day of the year. The payroll deduction is every two weeks. Spouse has already chosen to "take the advantage" of it for the year of 2021.

I don't like it that spouse is heavily invested in his company's stock. I dislike it even more that the price is locked at the last day, albeit 15% off. He may get better returns by just buying company's stock at regular price at regular frequency. But if that is the case, he may not even want to solely invest in his company's stock (for taxable), which is even better.

Can you provide some solid data to dissuade him from doing it again next year? Of course, if you think he's getting a good deal, then please let me know too. Thanks a lot.
TallBoy29er
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by TallBoy29er »

Follow up question for you: when is he permitted to sell?
brian91480
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by brian91480 »

Heavy concentration on any 1 stock is risky.

When I was a teenager... I worked for FLEMING... among other things they were in the grocery store business. Employees were offered 15% off Fleming stock buys. Many employees did it religiously.

The CEO was later charged with embezzlement... sent to prison... and the stock tanked.

Just one negative experience... buyer beware.
traveling_salesman
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by traveling_salesman »

Am I mistaken or is there an obvious arbitrage opportunity here? On 12/31, short the stock and make 15%?
traveling_salesman
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by traveling_salesman »

TallBoy29er wrote: Mon Feb 15, 2021 8:22 pm Follow up question for you: when is he permitted to sell?
Yes, I see I’m not the only one to smell arbitrage. :)
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by traveling_salesman »

brian91480 wrote: Mon Feb 15, 2021 8:26 pm Heavy concentration on any 1 stock is risky.

When I was a teenager... I worked for FLEMING... among other things they were in the grocery store business. Employees were offered 15% off Fleming stock buys. Many employees did it religiously.

The CEO was later charged with embezzlement... sent to prison... and the stock tanked.

Just one negative experience... buyer beware.
In this and other things, it usually pays to ask: how did I get so lucky? Why do they offer me the discount? And will I continue to remain so lucky? :)
SlowMovingInvestor
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

This sounds a little like ESPP plans.

1) But those allow you to change your contribution to 0 anytime during the year and get all your contributions back. Does this plan allow that or is he locked in ?

2) Unless the company stock is very volatile, and is likely to change during the lockup period (if any), this is a pretty good deal in general. The actual return is very good. I haven't calculated the IRR, but it's probably around 36%
Last edited by SlowMovingInvestor on Mon Feb 15, 2021 8:38 pm, edited 1 time in total.
SlowMovingInvestor
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

traveling_salesman wrote: Mon Feb 15, 2021 8:27 pm Am I mistaken or is there an obvious arbitrage opportunity here? On 12/31, short the stock and make 15%?
Most companies don't allow employees to short their stocks or sell calls or the equivalent.
Last edited by SlowMovingInvestor on Mon Feb 15, 2021 8:37 pm, edited 1 time in total.
sailaway
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by sailaway »

TallBoy29er wrote: Mon Feb 15, 2021 8:22 pm Follow up question for you: when is he permitted to sell?
This is really the important question.

For most stock programs, it really does make sense to participate, then sell as soon as possible and invest in your usual allocation.

It is probably verboten to short your own company's stock.
SlowMovingInvestor
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

traveling_salesman wrote: Mon Feb 15, 2021 8:31 pm
In this and other things, it usually pays to ask: how did I get so lucky? Why do they offer me the discount? And will I continue to remain so lucky? :)
This is extremely common for ESPP plans, although those typically have 6 month periods (and some other complexities). It's not unusual.
alex_686
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by alex_686 »

This is not a horrible deal - it may even be good.

Would your portfolio be heavily concentrated in one stock? I assume you are investing in more than just this one program. And I assuming that you would be selling in a year or 2? I am assuming 2 years to get the long term capital gains. I doubt this would crack 10% of your portfolio.

Is it high risk to be concentrated in one stock? Or low risk because you get a instant 15% return, which is more than the expected return of the market?

Details matter, but I would be inclined to take it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
SlowMovingInvestor
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

alex_686 wrote: Mon Feb 15, 2021 8:42 pm Is it high risk to be concentrated in one stock? Or low risk because you get a instant 15% return, which is more than the expected return of the market?
It would be 15/85 = 18% if the money were invested for the whole year, but likely around double that because the money is being invested throughout the year. The exact IRR would require some calculations, but it's very good.

That is an excellent return.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by traveling_salesman »

SlowMovingInvestor wrote: Mon Feb 15, 2021 8:36 pm
traveling_salesman wrote: Mon Feb 15, 2021 8:31 pm
In this and other things, it usually pays to ask: how did I get so lucky? Why do they offer me the discount? And will I continue to remain so lucky? :)
This is extremely common for ESPP plans, although those typically have 6 month periods (and some other complexities). It's not unusual.
I agree. It seems I should have emphasized more the second half: will I remain lucky? Usually the answer is “no” and the best thing to do is to diversify once you complete your mandatory holding period.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by hi_there »

Unless the stock is incredibly volatile, the stock price has plunged since December 31st, the deal will result in high single stock concentration in your net worth, or you have negative insider knowledge, this sounds like a great deal.
SnowBog
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SnowBog »

This is likely an ESPP. Usually they are limited to $25k in stock value purchased per year. In my company, it's a quarterly purchase with a limit on how much of our paycheck can be contributed. Once the purchase clears, I sell the stock immediately. So I view it as a deferred paycheck with "free money", which usually gets reinvested into a total stock market.

The main thing to consider is if there is a required holding period. If you are restricted from selling the stock for several months (or years), that would be a risk you'd have to calculate.
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FIREchief
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by FIREchief »

Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Spouse works for a Fortune 500 company. The company offers employees stocks at 15% off. However, the 15% off price is based on the last day of the year. The payroll deduction is every two weeks. Spouse has already chosen to "take the advantage" of it for the year of 2021.
Would you please explain this more? 15% off what stock price? When are the shares purchased? You mention a calendar year and payroll deduction. Does this mean that your spouse can buy company stock at 85% of the previous year's close throughout 2021? Your post is really confusing. :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by manatee2005 »

FIREchief wrote: Tue Feb 16, 2021 12:29 am
Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Spouse works for a Fortune 500 company. The company offers employees stocks at 15% off. However, the 15% off price is based on the last day of the year. The payroll deduction is every two weeks. Spouse has already chosen to "take the advantage" of it for the year of 2021.
Would you please explain this more? 15% off what stock price? When are the shares purchased? You mention a calendar year and payroll deduction. Does this mean that your spouse can buy company stock at 85% of the previous year's close throughout 2021? Your post is really confusing. :confused
This sounds like ESPP. You contribute money out of your paycheck and then they purchase it at 15% off the Dec 31 price. It looks like this company does it once a year, but you have to sign up for the year. It looks like the spouse is going to contribute all of 2021 into this ESPP pool and then on dec 31, 2021 they get the shares at 15% discount. Usually it can be sold immediately so it's a low risk high reward environment, but only if you sell.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by manatee2005 »

traveling_salesman wrote: Mon Feb 15, 2021 8:31 pm
brian91480 wrote: Mon Feb 15, 2021 8:26 pm Heavy concentration on any 1 stock is risky.

When I was a teenager... I worked for FLEMING... among other things they were in the grocery store business. Employees were offered 15% off Fleming stock buys. Many employees did it religiously.

The CEO was later charged with embezzlement... sent to prison... and the stock tanked.

Just one negative experience... buyer beware.
In this and other things, it usually pays to ask: how did I get so lucky? Why do they offer me the discount? And will I continue to remain so lucky? :)
It's an employee retention tool. In my company we love ESPP.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by manatee2005 »

traveling_salesman wrote: Mon Feb 15, 2021 8:27 pm Am I mistaken or is there an obvious arbitrage opportunity here? On 12/31, short the stock and make 15%?
The stock doesn't drop 15%.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by alex_686 »

manatee2005 wrote: Tue Feb 16, 2021 2:06 am
traveling_salesman wrote: Mon Feb 15, 2021 8:27 pm Am I mistaken or is there an obvious arbitrage opportunity here? On 12/31, short the stock and make 15%?
The stock doesn't drop 15%.
Buy the stock at 85%, short sell at 100%, so no market risk, this generates 15% risk free return. Hence arbitrage.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by dbr »

On the average that the stock price does not change during the year and for a 10% of salary diverted to ESPP they are handing out a salary increase of 1.5%. They are also exposing the employee/investor to six months (average time span) gains and losses on the stock.

In the old days my employer offered an ESPP but you could sell the stock the day it was granted, thus generating a 1.5% salary increase. When they imposed a one year vesting period I bailed because I didn't want 10% of my paycheck at risk. As time went on I started getting management stock options and then my paycheck really was at risk. Anyway a lot of employees put away a lot of stock in the ESPP over the years and had very nice retirements because Megacorp did well over those years. But it didn't have to be that way. I am not sure those fine folks have completely realized how lucky they are.
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FIREchief
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by FIREchief »

manatee2005 wrote: Tue Feb 16, 2021 2:04 am
FIREchief wrote: Tue Feb 16, 2021 12:29 am
Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Spouse works for a Fortune 500 company. The company offers employees stocks at 15% off. However, the 15% off price is based on the last day of the year. The payroll deduction is every two weeks. Spouse has already chosen to "take the advantage" of it for the year of 2021.
Would you please explain this more? 15% off what stock price? When are the shares purchased? You mention a calendar year and payroll deduction. Does this mean that your spouse can buy company stock at 85% of the previous year's close throughout 2021? Your post is really confusing. :confused
This sounds like ESPP. You contribute money out of your paycheck and then they purchase it at 15% off the Dec 31 price. It looks like this company does it once a year, but you have to sign up for the year. It looks like the spouse is going to contribute all of 2021 into this ESPP pool and then on dec 31, 2021 they get the shares at 15% discount. Usually it can be sold immediately so it's a low risk high reward environment, but only if you sell.
Thanks. My old Megacorp never had anything like this. IIRC, I did get some stock options one year, but it was a token amount for something I must have done right. :P
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
hightechburrito
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by hightechburrito »

Here's good summary of the ROI calculation for a typical ESPP program: https://thefinancebuff.com/employee-sto ... pp-is.html

I say 'typical' in that it's been how the ESPP is run for a few companies I've worked at. Summary is:
1) Up to 10% of each paycheck is held back each pay period
2) At the end of each 6 month window, company stock is purchased at a 15% discount of the lower of:
a) Stock price at beginning of window
b) Stock price at end of window
3) Stock can then be held, or sold immediately.

If you consider that only 1 contribution is held for the full six months (and one is only held for a few days), the equivalent annual return is over 90%. And this is if the stock stay flat, or goes down in value over the 6 month period.

A few things to consider (or double check on your spouse's plan):
1) Confirm the price used to determine the discount. Most ESPP plans I've heard of use the lower of the beginning and end prices and discount off that.
2) Confirm that the stock can be sold immediately. I put in a sell order as soon as I get the alert that shares are in my ESPP account (without even looking at the price). I have heard of some ESPP programs that require you to hold the stock for some period after purchase.
3) More of an FYI, but the amount of the 15% discount will probably get reported on your W2 as income.
4) Reporting sale of this stock can be a bit tricky due to the discount. On mine, the cost basis is the FMV of the stock on the day I received it, not the actual price I paid (I assume because the discount is reported as W2 income).
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Stinky »

TallBoy29er wrote: Mon Feb 15, 2021 8:22 pm Follow up question for you: when is he permitted to sell?
OP still hasn’t come back with the answer to this most basic question.

In order to give good advice, we need to know this answer.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Kookaburra »

“This stock is normally worth $500/share, but if you buy within the next 10 minutes we’ll sell it to you for only $5/share and we’ll throw in a can of beans.”
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SnowBog »

Kookaburra wrote: Tue Feb 16, 2021 11:42 pm “This stock is normally worth $500/share, but if you buy within the next 10 minutes we’ll sell it to you for only $5/share and we’ll throw in a can of beans.”
Relevance?

Assuming this is an ESPP (as many of us suspect), these are attractive benefits of employers who offer them.
Stinky wrote: Tue Feb 16, 2021 6:52 pm
TallBoy29er wrote: Mon Feb 15, 2021 8:22 pm Follow up question for you: when is he permitted to sell?
OP still hasn’t come back with the answer to this most basic question.

In order to give good advice, we need to know this answer.
And if OP can answer this question, this might be a guaranteed return (assuming they can sell immediately). They can take the extra "free money" and do whatever they want with it (they [hopefully] don't need to hold the stock).

I strongly recommend anyone with an ESPP that includes a discount and no holding period to do the math for themselves. (Wish I knew this years ago...)
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Marseille07 »

Sounds like regular ESPP to me. What I don't understand is why the OP wants to have a say on this. It's a perk offered to the spouse. How to handle the shares would be a decision to be made together, but I'd be quite offended if my spouse tells me "sell your shares immediately, you're heavily invested in your company. And don't ever participate in another ESPP."
006
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by 006 »

This is not a bad deal and I would recommend your spouse takes it.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Nivek »

Like many said, common benefit at MegaCorps. My company used to do the same but the purchase was once a quarter. I've changed strategies over the years to meet my financial needs (never selling then using to buy a house, holding for a year then selling, selling as soon as I received it). If you can sell immediately, it's a pretty good deal. The only thing I don't like about this one is that your money is tied up a year. The question is do you think you can use the money differently and get a 15% return during the same time frame?

Back on my MegaCorp, when COVID hit, besides massive headcount reductions, they also reduced the discount to 5%. Not enough enticement for me now so for the first time in 24 years, I'm not buying company stock.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by AnEngineer »

OP, a lot of the responses sound as if they assume the price was set last year, but I read the shares will be purchased with 15% discount at the end of this year, correct? The only risk depends on the time between buying and first chance to sell. If the stock is incredibly volatile or that is long, maybe it could go down 15%. Otherwise, definitely buy.
Last edited by AnEngineer on Wed Feb 17, 2021 7:59 am, edited 1 time in total.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Cyanide123 »

Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Spouse works for a Fortune 500 company. The company offers employees stocks at 15% off. However, the 15% off price is based on the last day of the year. The payroll deduction is every two weeks. Spouse has already chosen to "take the advantage" of it for the year of 2021.

I don't like it that spouse is heavily invested in his company's stock. I dislike it even more that the price is locked at the last day, albeit 15% off. He may get better returns by just buying company's stock at regular price at regular frequency. But if that is the case, he may not even want to solely invest in his company's stock (for taxable), which is even better.

Can you provide some solid data to dissuade him from doing it again next year? Of course, if you think he's getting a good deal, then please let me know too. Thanks a lot.
My sister in law who works at Apple gets a similar 15 percent off stock. She asked me what to do, i told her to Max out however much she can buy and then eventually sell at the first chance she gets. You should do the same.
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Southtonorth
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Southtonorth »

I did a reply yesterday but it was not posted. Thank you all for your time and input! I really appreciate it. According to the response, it's not as bad as it looks, I guess.

My spouse can stop contribution at any time. He can sell at any time too.
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Southtonorth
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Southtonorth »

AnEngineer: Your understanding was correct. The price was based on the last day of the current year, not the last day of the previous year. Basically he's buying at the future price. Since I often hear about a 7-8% average annual return, this 15% off concentrated on one company doesn't seem to be a good idea.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by alex_686 »

Southtonorth wrote: Wed Feb 17, 2021 8:39 am AnEngineer: Your understanding was correct. The price was based on the last day of the current year, not the last day of the previous year. Basically he's buying at the future price. Since I often hear about a 7-8% average annual return, this 15% off concentrated on one company doesn't seem to be a good idea.
Let me make the argument for the other side.

First, he will be buying the stock on 12/31/2021 at a 15% discount. He can sell on 1/1/2022 and make a instant 15% profit? Am I missing something?

Second, I think you are looking at the risk/return wrong. You should not care about the risk/return of any individual position. What you should care is about the risk/return of your portfolio. If this represented 100% of your portfolio I think you would have a point. Maybe even 50%. But what percentage of the portfolio would this be? If under 20% you would be hard pressed to make a rational argument against it as presented. A security with average risk but twice the expected market return.

Third, to refine point 2 try to find the company's Beta and Volatility values. If Beta is above 1.2 or Volatility is above 30 you may have a concern. Maybe.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by 02nz »

Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Can you provide some solid data to dissuade him from doing it again next year?
Enron.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Stinky »

Southtonorth wrote: Wed Feb 17, 2021 8:39 am AnEngineer: Your understanding was correct. The price was based on the last day of the current year, not the last day of the previous year. Basically he's buying at the future price. Since I often hear about a 7-8% average annual return, this 15% off concentrated on one company doesn't seem to be a good idea.
Personally, I’d take a 15% guaranteed return, every year, over investing in almost any other asset.

Have withholdings from paycheck throughout the year. Company buys the stock at a 15% discount on 12/31. You sell the stock at market on 1/2 (or as soon as you can).

Rinse and repeat. Sounds like a winner.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by Jack FFR1846 »

So my understanding from your posts is this:

Money is with held throughout the year.

On 12/31/21, the price is set.

Spouse can now buy at 15% off that price......on 12/31?

Ideally, your spouse could pre-order a "sell all". eTrade allows this for my own RSUs and ESPPs. That would sell as soon as possible after the purchase. This avoids holding the stock for any time at all.

If that's the case, all that's lost is any return that could have been captured with the money with held through the year. What's gained is 15% minus any transaction costs.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

02nz wrote: Wed Feb 17, 2021 9:05 am
Southtonorth wrote: Mon Feb 15, 2021 8:18 pm Can you provide some solid data to dissuade him from doing it again next year?
Enron.
The stock isn't purchased until the end of the year. If the company were to totally collapse during the year, he'd almost certainly get all his money back.

ESPP plans at companies I worked for were slightly different and a better deal (they took 15% off the lower of two prices), but this is almost like free money if you can sell immediately.
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SlowMovingInvestor »

Southtonorth wrote: Wed Feb 17, 2021 8:39 am AnEngineer: Your understanding was correct. The price was based on the last day of the current year, not the last day of the previous year. Basically he's buying at the future price. Since I often hear about a 7-8% average annual return, this 15% off concentrated on one company doesn't seem to be a good idea.
As another poster pointed out, this is not (or should not be) 15% of your net worth.

You're concentrated for maybe 1 day until you sell. It's almost like free money, and the return is more like 36% annually (because the funds are invested throughout the year, not at the begining).
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Re: Spouse can buy company's stock at 15% off the price on 12/31

Post by SnowBog »

SlowMovingInvestor wrote: Wed Feb 17, 2021 9:33 am
Southtonorth wrote: Wed Feb 17, 2021 8:39 am AnEngineer: Your understanding was correct. The price was based on the last day of the current year, not the last day of the previous year. Basically he's buying at the future price. Since I often hear about a 7-8% average annual return, this 15% off concentrated on one company doesn't seem to be a good idea.
As another poster pointed out, this is not (or should not be) 15% of your net worth.

You're concentrated for maybe 1 day until you sell. It's almost like free money, and the return is more like 36% annually (because the funds are invested throughout the year, not at the begining).
OP - for clarity, the overwhelming opinion is to max out ESPP offerings of possibly, but immediately sell. It's very low risk with a great return.

It is not recommended to keep the shares. That is where you start to have risks increase.
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