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.
@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.
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.
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?