Investing in your own employer seems like a no-brainer. Whether through options, restricted stock, or common stock purchase plans, why wouldn't you buy in? But the decision's not as obvious as it may seem, and loading up on your own company's shares could produce as much pain as profit. Before you decide, make sure you know all the pros and cons.
Don't know much about employee stock plans? You're not alone. The folks at Fidelity Investments recently studied nearly 2,000 stock plan participants at 130 companies around the globe, discovering a few surprising facts:
- 35% of respondents didn't understand the tax implications of selling their stock.
- 10% confessed to not researching their investments.
- Company stock plans were participants' second-biggest savings vehicle; 401(k)s were the biggest, by far.
- Only 52% could "generally" explain their plan, and 11% couldn't explain it "at all."
According to the National Center for Employee Ownership, tens of millions of employees participate in thousands of different stock-related plans, so this is definitely not an obscure issue.
Know the rules
Clearly, it's important to know how your available investments work -- and I'm not just talking about stock plans. Many people don't understand or fully employ even simpler, more common vehicles such as IRAs. They don't appreciate that money parked in Roth IRAs for decades may ultimately be withdrawn tax-free, and they often don't get around to making annual contributions before the deadline passes.
Stock options also have a finite window. You typically must exercise them within a certain number of years, and if you leave a job, you may only have a few days or months in which to exercise stock options. There are also major tax issues involved; in some cases, simply exercising a stock option, without promptly selling the stock you receive, can trigger an unexpected and potentially sizable tax hit.
More importantly, employees who sink the bulk of their savings into their own company's stock become dangerously undiverisifed. It's easy to make a good case for investing in your employer; it's the company you know best. But that doesn't mean you know everything about it.
If you worked for Chimera Investment
Similarly, workers for Rare Element Resources
Even if you have researched your employer, you could still end up blindsided. Enron employees lost more than $1 billion in their retirement plans when the company's fraud came to light. The BP
Even if your company stock amounts to "just" 25% of your entire nest egg, keep in mind that much or all of your current livelihood also depends on that same company. If it falls on hard times, you could face a double whammy: a pink slip and a sinking stock.
A glance through Brightscope.com's reports on familiar companies shows that investors have devoted considerable chunks of company 401(k) plans to their employers' stock. At Sirius XM Radio
The Wells Fargo
The big picture
Buying your company's stock isn't necessarily stupid. It can still make particular sense to buy company stock if you're getting your shares at a discount.
But to preserve your best odds of retiring rich, be sure to consider your financial big picture. Make sure you're comfortable with the percentage of your overall assets and income invested in your employer. And as with any other investment, keep on top of your company's progress and health.
For great stock ideas, read this free report from The Motley Fool to find the names of five stocks we own that you should, too.
Longtime Fool contributor Selena Maranjian owns shares of Corning, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Chimera Investment. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.