Every company offers it’s stock as a bonus in lieu of cash benefits. While some offer it at employee level, others limit it to higher positions within the organization hierarchy. So even if you are not being offered anything at the moment, it does;t hurt to know a little bit about how they work.
There’s two types of plans ESPP (Employee stock purchase plan) and ESOP (Employee stock ownership plan). ESPP allows employees to purchase company stocks in a tax efficient manner, often at a discounted rate. ESOP, on the other hand, provides employees an ownership in the company’s stock, often at no cost. Both plans are a way for the company to foster employee loyalty by offering them a share in the company’s success. One of the major differences in the two types of plans is their funding. While with an ESOP, the company buys the stocks for the employee, the stocks cannot usually be cashed until the employee retires or leaves the company. There is also a period before the benefits kick in, before which, the stocks are as good as useless to the employee. ESPP on the other hand, is funded by the employees themselves, usually through payroll deduction. But, the stocks are available to cash as soon as the benefits kick in, rather than waiting to retire or changing employers.
While both plans have their pros and cons, companies offer at least one as you move higher up the ladder, in lieu of monetary compensation. But if you had the option to choose what kind of benefits you receive, it helps to know when choosing stock plans would pay off over choosing other kinds of benefits. Listed below are some of the things to consider when crossing stock based plans.
1. Depending on the plan, you could save about 15% on your stock which translates big when the stock grows.
2. Some plans have the “lookback” option, which is essentially you buying the stock when it was the lowest in a given period.
3. ESOP are just FREE stocks.
4. Some ESPP plans have a employer match. The employer adds to a part of your stock. Again, more FREE stock.
5. Even the most basic of plans offer around 10% discount, which can account to more as the stock grows.
Things to think about before buying
1. High potential = high risk. So you don’t want to be over-invested.
2. A diversified stock is a safe stock. ESPP or ESOP contributions should be limited to about 10% of your entire portfolio.
3. If you’re investing 10% of your diversified portfolio in one company, you will need to monitor that company. This applies to any stock that you own.
4. Know when to sell. Keep on top of news items that could be red lights to stock prices. And not just that. You might also benefit from selling your ESPP stocks as soon as your benefits start. So, whether or not the stock prices rise, you’ll have cashed in on the free stocks that you received with the discounted prices.
These are only a few of the points that you should consider and keep in mind when working with ESOP and ESPP. And as always, it never hurts to research a bit more. For starters, you can head on over to Two cents @ Lifehacker. They have a number of embedded links to further information.