Bill Woessner wrote:
> Hi all. I'm seeking advice on whether or not to participate in my new
> employer's stock purchase plan. I haven't started the job yet so I
> don't have all of the details. But the benefits crib sheet they gave
> me spelled it out like this: You can contribute up to 10% of your
> salary toward the plan and you purchase the stock at a 15% discount.
> It does not mention how long you are required to hold the stock.
>
> On the surface, this seems like a simple way to get a 1.5% (= 10% *
> 15%) bonus. Of course, that assumes the stock stays level.
> Normally, I'm adverse to holding that much stock of a single company.
> So I'd want to sell it ASAP. But there is the incentive to hold on to
> it for a year to get long-term capital gains treatment.
>
> So basically, I'd just like to hear what other people have to say
> about such programs. If you have personal experience, so much the
> better!
First, how often is the stock purchased? Is this plan annual? (My
experience is every 6 months.) Is it 15% off the lower price of the two
endpoints or just 15% off the end?
You see, even with moderate volatility, the 'lower of two endpoint' rule
will give you a chance at buying at a greater discount, at least half
the time. And to jIM's point, it may be 1.5% bonus, but it's better than
a 15% return on the invested money.
Say the plan is annual, and you put in $100/month. Over 12 months it's
$1200, but the average time you are out that money is 6 months (Maybe
even 5.5) as you went from $0 to $1200 over the year. And the return is
not 15%, it's 100/85 (as you bought at 15% discount) or 17.6%.
So your potential is 17.6% in an average 6 months holding time VS the
risk you stock drops 15% before it hits your account so you can sell. Do
stocks drop that much ever? Of course. You have to judge for yourself
based on volatility and your own risk tolerance.
Joe
www.blog.joetaxpayer.com
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