Is a 5% discount on ESPP really worth it or just a gimmick?

My company offers a 5% discount on employee stock purchases. Honestly, I’m on the fence about participating. 5% doesn’t seem like much, especially when the money is tied up in a single stock for at least a year (to avoid short-term capital gains taxes).

I’m big on index funds, so putting money into just one stock makes me uneasy. Am I missing something here? Are there any benefits beyond the immediate 5% discount that make this worthwhile?

Edit: Clarified my concern about short-term capital gains taxes.

Why are you worried about short-term capital gains? If you sell immediately, you lock in profit. Holding for a year means risking the stock dropping.

Buying and selling right away gets you a 2-3% return after taxes for like 5 minutes of work. Almost no risk (unless the stock tanks immediately), and if you can buy enough, it’s a decent chunk of profit.

Your other option? Do nothing and make nothing. I’ll take the quick profit every time.

@Clarke
Yeah, unless there’s a required holding period, this is a no-brainer.

I was in a 10% ESPP for years. The stock shot up 10,000% in six years, I cashed out, then it dropped 87%.

Depends on how much you believe in the company long term.

Frost said:
I was in a 10% ESPP for years. The stock shot up 10,000% in six years, I cashed out, then it dropped 87%.

Depends on how much you believe in the company long term.

Holding the stock after purchase vs. just participating in the ESPP are two totally separate discussions.

@Bevin
Ours let us buy at 90% of the lower price between the start and end of the period. If the stock climbed during that time, we already had built-in gains. It was easy to hold because the stock just kept going up.

Frost said:
I was in a 10% ESPP for years. The stock shot up 10,000% in six years, I cashed out, then it dropped 87%.

Depends on how much you believe in the company long term.

5% off ESPP: Worth it?

@Lael
If it’s 5% off the lower price at the start or end of the period, maybe.

Frost said:
@Lael
If it’s 5% off the lower price at the start or end of the period, maybe.

Congrats on the 10,000% gains! Hope you’re enjoying that early retirement!

Frost said:
I was in a 10% ESPP for years. The stock shot up 10,000% in six years, I cashed out, then it dropped 87%.

Depends on how much you believe in the company long term.

Sounds like biotech?

@Val
Nope, just a software company.

A lot of people misunderstand ESPP tax rules.

If it’s a qualified ESPP, you need to hold for two years from the grant date AND one year from the purchase date to get the best tax treatment. If you sell before that, the discount is taxed as ordinary income, not capital gains.

So if you think you’ll need to sell within a year, don’t even bother—it won’t be worth it.

If your company has a non-qualified ESPP, ignore everything I just said.

@Galen
Also, if you sell early while taking a loss, you STILL owe taxes on the discount. This can hit you harder than expected.

Other factors to consider: What price does the ESPP use? Some plans let you buy at the lowest price between the start and end of the period, which can be a huge advantage.

Is it just a 5% discount, or does your plan offer anything extra?

Would you buy the stock in the open market just because it dropped 5%?

Riley said:
Would you buy the stock in the open market just because it dropped 5%?

That’s a good way to look at it… and no, I wouldn’t lol.

Cameron said:

Riley said:
Would you buy the stock in the open market just because it dropped 5%?

That’s a good way to look at it… and no, I wouldn’t lol.

There’s your answer.

5% discount on a single stock? Not worth it.

Montana said:
5% discount on a single stock? Not worth it.

Why not? If you’re allowed to buy $15K worth, that’s a guaranteed $750 profit.

Teegan said:

Montana said:
5% discount on a single stock? Not worth it.

Why not? If you’re allowed to buy $15K worth, that’s a guaranteed $750 profit.

Unless the stock drops. If you sell immediately, then you owe short-term taxes, which makes the gain smaller.