When it comes to financial planning, investing in company stock can be one of the best decisions you will ever make. Concentrated positions in high-growth companies have the potential to create vast amounts of wealth for each and every shareholder in a brief amount of time. Employers will often match your 401(k) contribution, offer a discount to purchase the stock, or offer options to purchase the stock as compensation or bonuses. From the employee perspective, this gives you a vested and financial interest in the performance of the company. This is no longer your job – you are an owner, you participate in profitability, your actions can have a direct impact on the value of your shares. This is great!
We have seen many local companies use these tools to reward employees. Unfortunately, any potential reward like this carries risk. As a financial planner, we love helping business executives use this tool to achieve their goals, but ask clients to understand some of the risks of having large exposure to loss in the health of one company (think Enron and Worldcom). So consider the following three tips when buying into the stock of your own company.
1) HAVE A PLAN!!! – We know this is redundant, but understanding your goals and objectives in relation to a concentrated investment in company stock is even more important. Know how much you are willing to invest your company stock – 5%, 10% or 25%? If the position becomes greater than this amount, will you sell some off?
2) UNDERSTAND YOUR INVESTMENT – We seek to educate clients on the nature of their investments each day. However, as an employee in a company, YOU are the most qualified person to quantify the health of your organization. Think like a business owner (you are one). Is the organization running effectively, growing its customer base, getting more efficient, adding employees? Be aware of your surroundings and ask yourself, is investing in the company you spend 40 or more hours a week in a good investment?
3) SEEK ADVICE – Talk to your co-workers, your family, and your financial planner. Probe for their opinions and views of the company. You may find they are very different than your own. Explain the investment to your family, explain the risk, and ask them if they are comfortable with the investment. Finally, seek professional, objective advice.
Investing in company stock has the potential to completely change the financial position of you and your family. As with most decisions, there are two sides to this coin. As always, plan prudently and invest intelligently.