I just completed a new article over on Infobarrel about E.S.P.P. (Employee Share Purchase Plan), but here I can go into a little more detail here about my own personal experiences with them.
In case you don't know what an E.S.P.P. is, it is a method for companies to give employees shares in that company at a discount price.You give the company a certain percentage of your after tax wages and it buys (or creates) stock in the company at a discount price using that money and hands it over to you. You get the benefit of a discount of 15% from the market price of the stock.
When the company selects the price to discount is a area of variation between many E.S.P.P.'s. In the generic examples I used, the company can select the lower of the opening and closing periods of the E.S.P.P.
That meant if the stock was at $20 on the first of January and $22 on the 30th of June, the company would buy the lower of the two numbers at a discount of 15%, so in that example, they would pick the $20 price, buy them at a 15% discount; 20 * 85% = $17
So here you are on July first, with a bundle of shares bought at $17 but now worth $22. Hurrah!
Unfortunately, the company I work for recently implemented a change to the E.S.P.P. whereby only the closing price of the six month time window is used as the discount. Using the example above, the company purchases the stock at the closing price on the 30th of June, which was $22.
That means I get $22 * 85% = $18.7
As you can see, I didn't do as well as the person who gets the lower of the two prices.
The E.S.P.P. is still a great scheme though, as I now have $22 - $18.7 = $3.3 in profit for doing nothing in particular other than putting some of my wages aside for six months. That's a 17% profit before taxes, in six months, a result you would be hard pushed to get with deposit accounts, bonds, mutual funds or shares.
There are some more technical discussions on how the return is even better if you take the fact that the money was only on average locked up in the E.S.P.P. for three months based on Internal Rate of Return (I.R.R.) but this is covered in much better detail on this blog.
Another hard learnt lesson, make sure to sell the shares straight away. The above calculations are based on this action as it locks in the 15% discount and 17% profit and avoids the risk of the share price falling to near or below what you paid for them. I made to unfortunate mistake of not logging on to my company website on the first of January and came into the office on the second of January to find that the share price had dropped to close to the discount price I had paid, almost negating the purpose of participating in the E.S.P.P. I won't be caught like that again and let this be a lesson to you so as to avoid doing the same.
Only hold onto the shares if you are extremely confident that the company's share price is set to shoot skyward.
In case you don't know what an E.S.P.P. is, it is a method for companies to give employees shares in that company at a discount price.You give the company a certain percentage of your after tax wages and it buys (or creates) stock in the company at a discount price using that money and hands it over to you. You get the benefit of a discount of 15% from the market price of the stock.
When the company selects the price to discount is a area of variation between many E.S.P.P.'s. In the generic examples I used, the company can select the lower of the opening and closing periods of the E.S.P.P.
That meant if the stock was at $20 on the first of January and $22 on the 30th of June, the company would buy the lower of the two numbers at a discount of 15%, so in that example, they would pick the $20 price, buy them at a 15% discount; 20 * 85% = $17
So here you are on July first, with a bundle of shares bought at $17 but now worth $22. Hurrah!
Unfortunately, the company I work for recently implemented a change to the E.S.P.P. whereby only the closing price of the six month time window is used as the discount. Using the example above, the company purchases the stock at the closing price on the 30th of June, which was $22.
That means I get $22 * 85% = $18.7
As you can see, I didn't do as well as the person who gets the lower of the two prices.
The E.S.P.P. is still a great scheme though, as I now have $22 - $18.7 = $3.3 in profit for doing nothing in particular other than putting some of my wages aside for six months. That's a 17% profit before taxes, in six months, a result you would be hard pushed to get with deposit accounts, bonds, mutual funds or shares.
There are some more technical discussions on how the return is even better if you take the fact that the money was only on average locked up in the E.S.P.P. for three months based on Internal Rate of Return (I.R.R.) but this is covered in much better detail on this blog.
Another hard learnt lesson, make sure to sell the shares straight away. The above calculations are based on this action as it locks in the 15% discount and 17% profit and avoids the risk of the share price falling to near or below what you paid for them. I made to unfortunate mistake of not logging on to my company website on the first of January and came into the office on the second of January to find that the share price had dropped to close to the discount price I had paid, almost negating the purpose of participating in the E.S.P.P. I won't be caught like that again and let this be a lesson to you so as to avoid doing the same.
Only hold onto the shares if you are extremely confident that the company's share price is set to shoot skyward.
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