If you work for a big company, and they have publicly traded stocks, there’s a chance they also offer an ESPP to their employees. So what is an ESPP and why should you opt into it?
An ESPP (Employee Stock Purchase Plan) is a program run by a company in which its employees can opt to use part of their paycheck to buy discounted company stock. This means, say if you work for Google, you’re able to contribute 5% of your salary to buy $GOOGL stock at 10% the normal price – you get the best bargain on the stock just by being an employee. You can normally opt to contribute anywhere between 1-15% percent of your paycheck, and most employers give a 10% discount on their stock.
What’s great about the ESPP is that it’s essentially a way to earn free money. Due to the 10% discount at purchase, you’re automatically earning 10% profits on your shares, as soon as your balance is vested. How? Well let’s say you opt to contribute a percentage that comes out to $100 from your paycheck each pay cycle towards your ESPP. If your company’s stock is trading at $55, but you elect for the ESPP, you’re able to buy 2.02 shares at $49.50 (10% discount). If your friend Sally went to her broker the same day and tried to buy $100 of the same stock, she’d only be able to buy ~1.82 shares (since she’s buying at $55.00) of your company’s stock. You get more bang for your buck, just for being an employee.
What’s great is that as soon as the balance and trade is settled into your account, you could hypothetically immediately sell your stocks and cash in on that 10% profit! Or, keep the stocks in your brokerage account and see how they grow over time. I’d suggest keeping an eye on the stock price over time, and if it starts to fall below your comfort level, still stay in your ESPP, but cash out as soon as you can to lock in your profits.
Of course, not all companies participate in ESPP plans. If you’re working for a company that’s about to start offering it, or you haven’t opted in to your ESPP already, reach out to your HR and hop on the ESPP train.
Some notes of caution, however: don’t opt in for more than you can afford. If you’re living paycheck to paycheck, while the cash out on ESPP might sound nice, don’t opt to put in 15% of your pay if that will dramatically impact your cash flow. I’d suggest starting at 1%, getting your toes wet, and moving up the percentage in the ESPP once you get more comfortable with how the program works, the company’s stock performance, and your post-ESPP paycheck/cashflow.