If you’re offered an Employee Stock Purchase Plan (ESPP) at work, I highly suggest you max out your contribution. Why, you may ask? Here’s my 3 reasons:
1. Guaranteed profit – If you sell your shares as soon as you can, the discount (usually 15%) is virtually locked in so it’s almost guaranteed profit.
2. Return > discount – If you think the return for an ESPP is its discount, it’s actually slightly more. The calculation is 100 ÷ (100 – discount).
For example: Assuming the discount is 15% (decent), the return would actually be 100 ÷ (100 – 15) = 17.65% (slightly more than decent).
3. Return is significantly greater than discount – The most important point: due to the timing of the ESPP mechanism, the return is not just 17.65%, but something much greater. It would actually be somewhere in the neighborhood of 90% (a very good neighborhood to be in). If you’re interested in the explanation, The Finance Buff details it here. So the only reason not to do this is if you know you can produce returns greater than 90% a year (easier said than done). If not, then you should contribute as much as you can to your ESPP.
I just wish I could contribute 100% of my salary.
1 response so far ↓
1 Minji Wong // May 30, 2008 at 2:47 pm
Thanks for the advice. Very logical, thought through. I’ll definitely contribute, since today’s the last day to purchase ESPP for the rest of the year.
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