(Guest Post by Gene Roberts, who previously wrote about the zen of couples budgeting)
If you are lucky enough to work for a company that offers an Employee Stock Participation plan (or ESPP), it should be a rather simple decision to participate. If it’s not, KEEP READING! I hate to see people walking away from free $$$.
When you participate in an ESPP, a deduction is setup as a percentage of your pay. Every 6 months the plan purchases stock in the company for you at a discount to the market price. The industry standard is about a 15% discount to market. That is what my employer’s plan offers, at a minimum. My plan, like many, takes the 15% discount off of the lower of the market price at the beginning of the period or the end. So if the company’s stock price increases over the 6 month period, you can really make a killing (as you will see below).
Some plans require you to hold onto the stock for a minimum period of time which can be risky in today’s financial environment. But many allow you to do what my company terms a “quicksale” and sell the stock a.s.a.p. The quicksale sells the stock as soon as the 3-day waiting period for settlement is over (from the purchase). And since in that short window there is the possibility that the stock price could plummet, there is no guarantee that this investment will not lose money. However that chance is very slight if you are able to turn right around and sell it in 3 days.
I checked the records for the last 12 years on my company’s plan. While in some cases the market price on the day of the quicksale had declined from the day the ESPP bought the stock, the lowest ROI for the quicksale was 10.2% (for reference, had the quicksale price been the same as the market price on the purchase date the ROI would be 17.65%). But you have to balance the slight risk that the stock will tank over a short period of 3 days against the chance that the stock price will have increased over the 6 month period of the program.
Even if the stock price declines over the period, you are still buying at the 15% discount to market. But if it goes up, you can make much more than the 15% discount. That stacks the odds heavily in your favor. The highest ROI in the 12 year history I researched of my company’s plan was over 50%. But as in all things in life there are no guarantees and your mileage may vary.
When the program announces the purchase I usually ask around and see who participated among my co-workers. I am astonished that so few participate in the program. By and large the argument that they always come up with is “You only make 15% on it – what’s the big deal?” More important than the minor (but annoying) misconception that a 15% discount to market means that the return is 15% (it actually represents a 17.65% ROI), I find it curious that those declining the opportunity seem to be confusing ROI with APR.
Whether it’s an investment or a loan, most of us are conditioned to think in terms of an annualized rate of interest. But when you incorrectly assume that a ROI is annualized you can’t compare it accurately with other investments which are.
In the case of my company’s six month ESPP, the money is not “invested” for a whole year. It is deposited in equally spaced intervals over the 6 month period. So some of the deposits have only been in the program for a very short time when the plan purchases. When you annualize the return on the investment this raises the rate significantly. I went over my pay records and recorded all the deductions for the program and put them into a spreadsheet. I set it up so I could compound interest daily as if the money was in a regular savings account. I then “played” with the interest rate until the interest earned matched the return I got on the ESPP.
If the ESPP “only” gets the 15% discount to market, the equivalent ANNUALIZED return is 67.5%!
The further upside if your program takes the lower of either the beginning or end of the period can be truly impressive. This last period my company’s stock did go up during the 6 months. The equivalent interest rate I would have had to earn would have had to be 136.95%!
Applying the lowest return during the 12 years I looked at, even that interest rate would have to be a 41% annualized return. The highest during that period would have been an equivalent 164% interest!
Nothing in life is truly guaranteed, but twice a year like clockwork I get one of the best returns on investment I ever get. It’s as close to a “sure thing” as I have come by. My only regret is that since the start of the economic downturn my company has reduced the percentage of my pay I can put into the program. But I put in the maximum I can and get all the benefits available from it.
If your company offers this program, and you aren’t already participating, I highly recommend giving it a second look.
Gene Roberts is a 41 year old machinery technician working in the semiconductor industry (BUM, , , bum, BUM, bum, BUM) and lives in Chandler, AZ. His net worth is about $282k and its growth has been conforming with the get rich slowly method all too well.
(Photo by Florida Keys–Public Libraries)
PS: Some of my favorite tools:
|Personal Capital (FREE) -- If you’re looking for a robust financial tracker, Personal Capital is the way to go! They’re like Mint, but on steroids and have much better tools for investment and net worth tracking. // Full review|
|Digit (FREE) -- A super easy (and automated) way to save. Every day Digit analyzes your income and expenses and will push money aside for you any time it sees extra sitting there. I've saved over $4,000 myself using them so far! // Full review|
|Acorns -- Having trouble finding money to invest? Check out Acorns – they round up all your transactions to the nearest $1.00 and drops the difference into an investment portfolio for you. Easy way to start investing! // Full review|