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December 16, 2008


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That sounds like a reasonable way to take advantage of the plan you have. It kind of subverts the intent of the plan - the firm would prefer you accumulate and hold a position in company stock. If too many people did the same, the plan would likely be shut down.

You aren't making an immediate 15% because of taxes as you had mentioned, but it seems you continue to say you make 15%. Bottom line is that if your company is a good one, you can wait a year in order to qualify for long term capital gains tax rather than short term. Even in the case of enron, your exposure would be limited. Presumably enron is atypical, so it really makes no sense to take the short term hit. I do agree that if you are benefiting from ESPP, then you do need to cash out periodically in order to prevent holding too much of your assets in any one investment, but that goes along with diversification.

My wife's company only gives 5% discount, and limits contributions to 10% of your pay. But with that said, if your company offers ESPP, then there really is no down side to maxing it out, just like matching 401k. Free money is free money.

Most of these plans I've seen have a vesting period where you are required to hold the stock before you can sell. The company would likely be better off just putting money into a profit sharing, 401(k) match or SEP for the employees. The administrative overhead to run the ESPP seems hard to justify unless it is used strategically to draw in executive talent.

I have to agree with Colin and Duane.

Your compnay has not thought through their plan very well if they allow this. I have worked at 2 companies with stock purchase plans. One was IBM and they required you to hold the stock for atleast 6 months before selling. If you did not do so you were kicked out of the plan for 1 year.

The second company a small company had no restriction. Most people did as you do, buying and selling within days. When I started with this company the plan continued just long enough for me to become elligible and then the closed it saying that most people were not using it as intended so it was too costly to run and not get the desired benefit for the company of vested employees in stock ownership.

This was disappointing to me and not because employees did this. People will do whatever they can and whatever you allow and don't make unavailable. So I am not faulting you FMF. The thing that was disappointing is that the company didn't put in place a plan like IBM which said you will use the plan as we intend or we will not allow you to continue using the plan. This seems quite simple. I am surprised your company has not done so and hopefully if they decide the plan is not being used as intended they would decide to modify it rather than kill it as my company did.

Really having a rolling 6 month holding period requirement is not that much of a risk. In your example if you held all 1900 dollars for 1 year and then sold them off you would never be exposed to more than 1900 dollars and you would get long term capital gain benefits. And really in the scheme of things a 1900 dollar exposure to one company is not that much. Given the amount you have accumulated in your various index funds, you might be surprised to find that you could actually have more exposure than that to some of the largest holdings in some of your funds. Perhaps you hold more than 1900 dollars of exxon mobile. They are a 500 billion dollar company after all.

I do this at work too and it is a guaranteed way to make 15% or more on my money. For our program the purchase price is set at the lower of the beginning or end of the period so if hte stock goes up over the period then you get even more discount. Say stock is trading at $10 at the start and $15 at the end you'd get the stock at 85% of $10 or $8.5 while the market value is $15.

I sell the stock immediately. I do not want to accumulate stock in my employer. Holding too much stock in your employer is risky.

The tax implications can be a little tricky.
If you do this then check with your employer for all the details on how they handle the taxes.

I found out the hard way that even if you buy and sell the stock as fast as possible and the 15% gain is reported as regular W2 wages I still have to file the capital gains transaction to tell the IRS that I bought stock on Tuesday at $20 and sold it on THursday or $20.15. Otherwise you get a nasty gram from the IRS about the stock you sold and how you owe them capital gains on 100% of that cause they assume you must have gotten it for free.

Also I have no way to avoid capital gains on the 15% entirely. For our program they always pull wage taxes unless you take a loss. So even if you hold the stock for 2+ years they still hit you for regular income tax on the 15% bonus portion. I'm not sure if that is how it always works or not, but thats how it works for me.


My plan actually facilitates automatic sale of the stock. They have an option to sign up for that lets you sell as soon as possible. The holding period is only like 3 days or something. Or you can choose to hold the shares however long you want. But the choice is ours. Its a big company and the plan has been around for a couple decades now.


I am just this month eligible to enroll in my company's stock plan. But unfortunately the discount is dropping from 15% to 5% in a few weeks! It's still a good deal, but I'm already contributing significantly to 401K and savings. Also, one caveat (probably for everyone) is that if I leave before a certain time (I think two years) I have to pay back the difference on any stock purchased during that time. I'm not confident enough that I'll stick around that long and don't want to be hit by a big bill if I leave. So for right now I'm limiting my purchase to a token 1% of income, but will probably bump it up when I'm more confident in my tenure.

Umm, need I point out the obvious that, no this isn't a way to guarantee yourself that return. The described plan is a lucky one that has an incredibly short vesting period. Whomever set it up is an idiot. (Sorry to be harsh, but it's true. No ESPP is meant to create increased volatility in the stock price.) But even with a short window, you could still lose money and lots of it. I'm not saying that what the author is doing isn't what I'd do in that situation, but it is irresponsible to describe this as a guaranteed return as if it eliminates the need to know if the investment is worthwhile and eliminates market risk. The author is just lucky his plan is so generous due to bad design.

Lots of great comments! I'll try to respond to as many as I can.

@Colin - My company limits their exposure by only authorizing a set number of shares for the ESP program. You're right, though, I think my approach probably does undercut the general intent of the plan.

@Tim - I was referring to making an immediate gross profit of 15% (not net). The discounted amount (which is essentially my profit) is treated as ordinary income. So, it is the same as if I had a savings account that earned 15% interest in 3 months. The interest I would earn there is treated as ordinary income. Capital gains don't really enter into the equation since there aren't any. So, when I sell the stock immediately I would pay short term capital gains on essentially zero. I could hold the stock long term but then I'm changing the entire nature of what I'm doing. I'd be increasing the amount of risk by lengthening the holding period without getting any benefit from it - unless I wanted to invest in my company's stock for the long term. But then why just limit myself to my company's stock? I could just buy any other stock and do the same. You're right - free money is free money and that's exactly what this is.

@Duane Gran - I was suprised the my company doesn't have a holding period. I'm with you. I'm under the impression that most companies have some holding period of at least a few months. Which begs the question: How does my company benefit? The only reasons I can come up with are 1) They earn interest on my income that they otherwise would have paid me during the holding period. 2) It's just another benefit they use to attract employees - in addition to a 401k plan. 3) For those that hold the stock longer term it gives employees a vested interest in the company.

@Apex - You could be right. Perhaps they haven't thought this thing all the way through. But, they've offered it in its current form for at least the last 6 years. I'm guessing that the bulk of participants don't flip the stock for the immediate 15% gain. You could be right, if everyone is doing that and they recognize it they may be more likely to disallow the benefit in the future.

Excellent point on putting the policy around the plan in place. Incidentally it's a Fortune 500 company.

@Jim - Wow! That is a great deal. I thought my company's plan was good but your's is even better. They fix our price as of the last day of the quarter but if they offered us the option like you get I'm sure our plan would be much sweeter. Way to go! (I pay ordinary wage income on the 15% discount as well.)

@Luke - Sounds like a good plan. Tough deal on the 10% drop. But I agree, if you can get a 5% return on your money in (I'm assuming) one quarter that's a good deal.

John (

Is 15% the most you can put aside? I would be all over this with as much as I could afford!

I do something like this all the time with my company's plan. They used to have a one-year waiting period, but realized that it was unenforcable, potentially illegal, and exposed them to liability by restricting employee opportunity to sell. (Now they simply try to brainwash us about loyalty and the intent of the program. And enough inert people fail to sell that it still works for the company)

In any case, I have a slight twist so I can benefit from long term gains, AND "sort-of" sell my stock the day it is received AND gets around the waiting period if there is one.

I am willing to hold a small amount of company stock in my portfolio. At the end of every period, when I buy discounted stock, I sell the exact same (or as close as exact as I can be) number of old shares.

I have been doing this for 15 years, and the only risk I carry is 10% (our max contribution) of one years salary exposed to company stock, because I am always one year behind in my sale. As noted by FMF this averages out over time. Some years I am selling at a loss, others at a good profit. But overall, I am holding a fixed number of shares and routinely taking out cash. (For the detail-oriented, you actually need a little more than one year backlog so you have a buffer if the price tanks. In our case, the price has halved since the last period, so I will get "too much" stock on Dec 31 to cover with last years stock.)

The only time I have regretted my strategy is when I haven't followed it because I was greedy. (If the stock is low that day, you're tempted to wait until tomorrow - but it may be on the start of a long slide so be rigid about it - sell the same day you buy.)

I am surprised that they let you sell the stock so soon as the purchase date. I would think that they would consider this trading and it would violate an agreement.

If I am understanding the taxation correctly, you could negotiate to get an actual salary of $76,984 and then you would have the same result and wouldn't be exposed to short-term stock price fluctuations at all. (In fact, you'd come out ahead because you wouldn't be paying transaction costs.)

Sarah - there is one HUGE difference for the company. When you buy stock from them, they take in money. (They don't buy shares in the market, they just issue more.)

Same applies for stock options.

The losers are existing shareholders, because their ownership is diluted. For example, if there are 100 shares outstanding, and I own 50, then I own half the company. If another 100 are issued to employees, then I only own 25%. Likewise, stock is devalued if it is valued on P/E ratio. Suppose profit (earnings) was 25. Then with 100 shares outstanding, earnings per share is 0.25. But if 200 shares are outstanding, EPS is only 0.125.

If market values my company at 10 times earnings, then each share would have been worth 2.5. But after the dilution, each share is only worth 1.25.

Obviously with millions of shares outstanding and only a few thousand new one issued each quarter, it's not so obvious. But over time, the dilution effect adds up.

Anyway - main point is that for the company, paying in stock is like printing money. And selling stock to employees is like printing money and selling it!

Just so everyone's clear on this -- the post above is a guest post. It's not written by me or about my company.

Most smart companies will not let employees sell their ESPP shares for at least one year.

Exellent post and replies. This is one of my hot buttons and I rarely see it mentioned anywhere. I have been taking similar advantage to plans like this for 15+ years at different companies. I only have a few things to add:
* The gross quarterly return is better than 15% because they deducted the money over the course of the quarter, not all at once at the beginning. So some of the money was taken out only a week before, and received 15% return.

* I'm not an expert on APR, but if you make 15%+ in a quarter, isn't that something like 60% for the year?

* My plans have always taken the price at the beginning of the quarter and price at the end, taken the lower of those two, then taken 15% off of the purchase price. So in the quarters the price goes down the loss is limited to the 15% +- what happens from purchase till sell (usually 1-2 weeks). But when the stock goes up during the quarter, you pick up the increase from the beginning quarter price till you sell, sometimes this is significant, and adds to the overall return. For example I've had quarters that started at $5/share, went up to $10/share. I purchased at .85x5= 4.25, then sold at $10, about a 50% return in less than a quarter. But if the price did the opposite, it would be limited to "only" a 15% gain.

* I have used these plans as a kind of "forced bonus". I live off the base income or less, and use the quarterly stock sell for whatever goal I'm working on, ie paying off debt, IRA, college fund.

The 15% gain is taxed as income. Do what the big guys do!!! Hold the stock for a year to get the lower capital gains tax rate and a gain in price possibly. Insure against the loss by buying a 1 year put option at the current stock price and bada bing you're protected against loss, lowered your tax rate on gains and have the potential for upside price movement. If the stock is not very volatile then the option price will not be expensive and you can have complete peace of mind.

Mark, I do get why the *companies* do it--I was just pointing out that this "sweet deal" is actually a way of giving the recipient less certain money on the cheap.


Giving the timing, it is minimal risk.

As the author of the article I figured I'd reply to more of the comments.

@ Neal - Unfortunately 15% is the max allowed under the plan. Incidentally, the federal government limits the amount of money you can invest in any ESPP to $25,000 per year.

@ Mark (3:07 AM) - That's an interesting approach. I trust that you've really thought it out and that it works as you say. A bit deep so I'm going to have to reread your post a couple times to make sure I follow. Assuming you're correct it presents a unique way to limit/reduce your risk of a longer holding period.

@ Mark (3:09 AM) - I'm a bit surprised there isn't a holding period either. Nonetheless, there isn't so I take full advantage of that fact.

@ Sarah - True. I could just negotiate the higher salary. That said I work for a company that employs around 10,000 people. They roll out policies and implement them. I don't think special cases would really work with that large of a corporation that is bound by policies. Either they will offer the plan or they won't.

@ Mark (7:15 AM) - In my case the company only authorizes 160,000 shares for the ESPP. That comprises about 0.1% of all the stock. So, I agree with your comments on dilution but, I think that it is relatively minimal (as you state later in your comments). Also, I suspect that this information is diclosed to the shareholder's in the annual report so theortecially investors should have this knowledge prior to buying the stock. Very good point on the company printing money. I agree that this is exactly what they are doing.

@ aa - I tend to agree that it benefits the company more from a bottom line point of view if they require a holding period.

@ Tim - Excellent points. We are talking about making a 15% Return in, at most, a single quarter. You're right. Since some of the money is withheld throughout the quarter that portion gets a 15% return over a matter of weeks. Sounds like your ESPP plan is even better than mine! I generally just use my proceeds to build up my short term savings. Which, for the time being, is lacking.

@ Bill - Thanks for the unique approach. I'm going to have to think on that one for a bit. Excellent thought!

Thanks for all your comments! Like Tim said, I've rarely seen anyone talk about ESPP plans either. To me it offers such a great potential to make easy money that I'm surprised you don't see it discussed/written about more often.

John (Financial Felow)

Financial Fellow said: I tend to agree that it benefits the company more from a bottom line point of view if they require a holding period.

I respectfully disagree. The timing of your sale has no impact on the bottom line, and it may have a negative impact on participation levels. They want as many employees as possible to participate, so they can "build ownership", and also give the company money. A holding requirement would keep some people out of the program, which would be to the company's disadvantage. I think they realize that many people don't sell, but feel good knowing that they could.

Our industry is very cyclical, and maybe they feel that people would be resentful if they were forced to hold falling stock.

Mark -

Agreed that the holding requirement could cause people to refrain from participating. But, the company would want employees to buy and hold the stock. If the holding period caused people to not signup these are probably the same folks that planned on selling the stock ASAP anyway (Like myself). So, in effect, the company is just keeping the folks who weren't planning on holding the stock for more than a week or two anyway out of the plan. If there was a holding period I suspect that some portion of folks that planned on buying at a discount and selling ASAP would still participate in the plan even if they had to hold it for one year. I believe that was where I was thinking when I made that comment.

Good point on the cyclical comment.

Unless your company becomes an Enron, else the deal is too good to pass up. You have little to lose while chasing a high yield of 15%.

Your company also cuts down on its expenses by withholding 15% of your pay. So it is a win-win situation.

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