Buy Your Company's Stock ?

For some people, this subject conjures images of the devils in management at Enron, WorldCom and other bankrupt former high flyers. Mesmerized by the sweet profit projections coming from their corporate chieftains, all too many employees of these firms put all of their retirement nest egg in company stock. When the company was riding high, they were wealthy on paper. When the company and stock collapsed, they were devastated.

Of course, everyone now knows that it is a mistake to place all your chips in your company’s stock.

It can be an even bigger mistake to leave your money there for an extended period of time. That’s where the Enron and WorldCom employees took a pasting. They failed to sell some or all of their shares at the time the stock price was peaking and turning south. In most cases they had time to salvage at least a portion their nest egg; too many hesitated and lost all.

Despite the horror stories of the past, employee stock purchase plans, or ESPPs, can be a good deal.

You get shares at a discount, and in most cases you can sell your shares and pocket the cash. The returns will supplement your IRA, 401K or other employer-sponsored retirement plan. You just have to be careful about monitoring the stock and picking the right buy and sell points.

Make sure to check with the human relations department at your company for specifics on your plan.

The key question to ask: When can I sell? You want as much flexibility as possible to avoid an Enron-style fiasco. Some companies allow you to sell only once a year, and some allow it twice a year.

Companies also establish “offering periods” when employees can purchase stock, often at a discount of 15%. In about 80% of the plans, the purchase price is determined on the first or last day of the offering period, whichever is lower. This is a great deal because you have a built-in profit of 17.6% (based on the 15% purchase discount) no matter the how the stock performs.

Let’s say you start putting money into your ESPP at the beginning of the offering period when the price of your company’s stock is 20, but at the end of the offering period the price is down to 15.

In this case, you can buy the stock for 15 less the typical 15% discount.

That’s when the selling decision becomes critical. Many times you are able to sell as soon as the offering period ends, and you can immediately pocket that 17.6% profit.

If you hang onto those shares until the next selling period, you’re taking on the market risk that your shares might decline in value. Of course, the stock could take off and pad your gain. If one sales period is July 1, for example, keeping those shares would have been a good idea this year with the DOW and NASDAQ in the early stages of a long rally. If the selling period is, say, early in 2004, you might consider an immediate sale because the rally has gone a long way and your stock could be vulnerable to a sell-off.

Most important, don’t ignore the shares building up in your account and count on the continuing goodwill of your company’s management. That’s what got Enron’s employee-shareholders into trouble.

Sit down with your financial adviser and decide whether to sell or hold. Take control of your future!

In your deliberations, you’ll have to consider the tax consequences. If you sell immediately, the proceeds will be taxed as ordinary income. If you hold a year or longer, the proceeds will be taxed at the lower capital gains rate. There are other tax considerations; see your financial adviser before making your move.

This is a good time to find out what is available at your company. ESPPs are usually available to all employees, unlike stock options that tend to be handed out to upper management. Handling options is another story entirely.

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