Many large companies listed on public stock exchanges offer their employees stock purchase plans. These can often be a excellent deal, and for the most part you should take part in them. For example, at a previous employer I was given the opportunity to buy company stock at a 15% discount to market value, once per quarter. An instant 15% gain you say? Sign me up! They limited how much you could commit to this; 10% of your wages, and I maxed out every cent (and would have done more if I could have). Side note, it technically was not an instant gain, as each paycheque this 10% would be deducted from your wages, and then at the end of the quarter the stock was purchased with this total. So while not 15% instantly, 15% over a quarter is still pretty solid!
Stock purchase plans are often viewed as a win-win for both employers and employees. The employee gets an (optional) form of extra compensation, and by making the employee a shareholder, their interest are better aligned with management.
However there is an important concept to keep in mind if you are using these. Diversification. We talk about it a lot around here. It is the single most important aspect of any investment plan. While you may want to reap the benefits of the discounted stock, you should probably sell it right away. This isn’t just a stocks vs bonds decision of becoming overweight equities, it’s a concentration of risk problem.
Say you have been investing in your employers stock for years, and now have a sizable nest egg. The stock has done well in the markets, so you feel pretty good with your decision. But what happens when a catastrophic event strikes your employer? You could be out of a job, AND be left with stock that is a fraction of what you paid. Take for example Canada’s oil and gas industry. The precipitous drop in commodity prices has hammered these companies, and there have been significant layoffs in the oil patch. If you also owned stock on one of these companies, you could be facing a scenario of no work, and a large investment in a company worth pennies on the dollar. Not a good scenario to find yourself in.
So while you should take part in company stock purchase plans (free money!), do yourself a favour. Sell it immediately.