One of the most popular “perks” of working for a publicly traded company is that your employer will offer you the chance to buy their stock. Most, if not all companies have a company stock fund in their 401k plans that invests in nothing but your employer’s stock. I’ve even seen some companies who give their 401k match as a contribution into the company stock fund.
Stock options are another popular way employers offer employees chances to buy company stock. Stock options are a chance for the employee to buy shares of stock in the company for a significant discount to the current market price of the stock. The catch with stock options is that there are usually a bunch of terms and conditions attached. You may have to work for the company for several years before your stock options will fully vest. There may be other restrictions on when, and how much of the stock you’d be able to sell at any one time as well.
Even if your company doesn’t offer purchase plans in the form of options or a 401k fund there is nothing to stop you from loading up on shares of your employer in the open market like any other investor is able to.
But is it really a good idea to load up on shares of the company you work for? Let’s look at some of the pros and cons…
Pros of owning stock in the company you work for
More knowledge about the investment – Chances are if you’ve been working for a company for any serious amount of time you have a pretty good feel for the inner workings of the company. You know the inner workings of the company’s operations, what business prospects or risks may lie ahead, how good/bad employee morale is, and various other bits of information that the average investor wouldn’t have access to.
Investing is a game of imperfect information. By actually working for the company you theoretically have more information than any other randomly chosen investor and should be able to make a smarter investment decision.
Higher Return on Investment – If you’re lucky enough to be able to purchase your employer’s stock at a discount. Your return on investment is automatically improved by that amount. A friend of mine can buy shares in his company at a 10% discount. He has to hold the shares for at least 3 months before he is able to sell them. Assuming shares rise over that time period, he’ll make 10% more on his investment than a typical investor would. Not a bad deal, right? You’d be a sucker to pass up on that!
Increased Loyalty – This is kind of a shared benefit between you and your employer. By owning stock in the company you work for you gain an added sense of loyalty to that company. Your company gains because you’ll work harder (in theory) now that you have skin in the game. You gain because the better of a job you do, the better your company performs (in theory) and the more money you all make as a result of the rising stock price.
Cons of owning your employer’s stock
Increased Risk – One thing most people forget is that your financial future is already heavily tied to the company you work for. In the form of your salary! Investing in shares of company stock on top of that only magnifies how intertwined your future is to your company’s performance. If the company you work for hits a rough patch, not only may you end up losing your job, but you may be holding a whole lot of stock that’s worth a fraction of what it used to be as well.
I’m not saying you should be scared that you’re working for the next Enron or Lehman Brothers. Just keep in your mind that no company is 100% safe. For years, bank stocks were considered some of the best investments around. Yet in 2007 I watched my company’s stock price fall from ~$60/share to $0.75/share at one point. I was lucky that I only held a small amount of company stock in my 401k. Others weren’t so lucky and any shares they’re holding onto today are still worth a fraction of what they were 5-10 years earlier. Something like that might have an impact on your future retirement plans, no?
Lack of Diversification – Diversifying our investments across different sectors of the stock market, bonds, real estate etc… is something we do to protect ourselves from any crazy swings in one sector (ie: European stocks may drop, but that will have no effect on how our US real estate investments fare). It’s the reason we develop an asset allocation strategy and try to stick to it!
Readily investing in company stock through your 401k plan or loading up on discounted shares through an employee purchase program can make it very easy to throw off your asset allocation , exposing yourself to too much risk as mentioned above.
The Bottom Line
It’s only natural to want to own stock in the company we work at. However, as with any investment, it has its risks and drawbacks. These risks shouldn’t automatically deter you from investing because owning stock in your employer can be as lucrative as any other investment out there. Just make sure you invest right by following some simple guidelines.
Stay Rational – Treat your employer’s stock just like any other investment you would be considering. Don’t put blinders on to the risks your company faces just because it’s your company. Remove emotion and loyalty from the equation and weigh the investment objectively before making your decision to invest.
Don’t Overdo It – If you choose to invest in your company’s stock make sure you do so within the confines of your overall portfolio strategy. Don’t buy so much that you throw your portfolio out of whack. Making sure the investment you make in your employer’s stock doesn’t exceed 5% of your portfolio is probably a good guideline to follow. Remember, just because you work there doesn’t mean the stock will perform better than any alternatives.
Does your employer offer you a chance to invest in their stock? Do you take advantage of the opportunity? How has it worked out for you?