Is the 15% Employee Stock Discount a Smart Move for My Future?

If you get employed by a publicly traded corporation, you may be able to buy shares at a discount. It’s practically free money since you start off with a gain, but returns only stay positive and grow over time if a company continues to perform well.

A Redditor in the Personal Finance subreddit recently shared that his employer has a stock purchase plan. We don’t know the company, but he mentioned that the company has outperformed the S&P 500 while soaring by 149% over the past five years. It’s likely a Big Tech company in the Magnificent Seven, but we don’t have concrete evidence.

The 25-year-old can only buy stocks equal to 10% of his salary, and he wants to know if it’s a good move. These are some details to consider.

Maxing Out Still Gives You Enough Money To Diversify

If the 25-year-old invests 10% of their salary into the company’s stock, he still has 90% of his salary that he can commit to other costs. Granted, he will have to plan for living costs and taxes, but there’s still enough money for him to invest in other assets. He mentioned that he also maxes out the 401(k) employer match, maxes out a Roth IRA, puts 15% into a high-yield savings account, and invests an additional 10% of his salary into index funds.

Investing in the stock offers an automatic 15% discount, and the 25-year-old said that there aren’t any details on his contract that mention a lock-up period. It also seems like a solid company based on its 5-year performance. The Redditor does not know how long he will have this opportunity. The company can change its policy at any time, and it’s also possible that the employee gets laid off due to corporate restructuring.

Maxing out on this opportunity almost guarantees that you outperform the S&P 500 even if the stock remains flat for an entire year. Many Redditors mentioned that they maxed out their salary contributions toward the employer’s stock for similar programs.

Hold Your Shares For At Least One Year

Even if you can sell your shares at any time, it’s not a good idea to do so. If you sell your shares right away, you have to pay short-term capital gains taxes on your gains. This isn’t a favorable position, since short-term gains are treated like ordinary income.

If you hold your employer’s shares for at least one year, you get taxed at the more favorable long-term capital gains tax rate. If you don’t account for taxes when calculating your investment gains, you may be in for a rude awakening when you file taxes and see how much you have to pay. The surprise will be less severe if you hold your shares for at least one year.

It’s even better if you don’t sell your shares at all and pass them on to your children as an inheritance.

Do You Feel Confident About The Company’s Long-Term Opportunities

Although the 25-year-old will score a nice discount if he capitalizes on this opportunity, not all companies are worth it. One Redditor said that his company’s shares had a 1-year lock-up period and lost 50% of their value during the pandemic. The stock never recovered, leading to many disgruntled workers.

The company’s 5-year gains sound promising and suggest that it can be a Magnificent Seven stock. The 25-year-old should assess the company’s revenue growth, net income growth, catalysts that can move the stock higher, and any headwinds. Luckily, the 25-year-old isn’t subject to a lock-up period, but you should analyze a company before buying any of its shares. 

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