Canadian Finance Blog

Posted: 20 Oct 2011 02:00 AM PDT

One of my favourite games when I was a kid was Stock Ticker. It was a board game based loosely around the stock market, where you pick what shares you think will go up, pay your “money” for them, and then watch the stock market rise and fall with the roll of the dice. Each time it was your turn, you could choose to buy or sell more stock. Repeat until rich or bankrupt. I loved the combination of strategy and chaos, however, I seem to always make the wrong choice, and end up slowly losing my stock and money until someone else won. Perhaps that is one of the reasons why I’ve never invested in the stock market.

I’ve had the choice to do so for quite some time. My employer offers an employee stock purchase plan. I make paycheque contributions to an account and with that money shares are purchased. In addition, to every dollar that I contribute, my employer matches a percentage. I’ve decided to start investing in the company that I work for, despite the possible risks and limitations. Here’s why.

Risks of a Employee Stock Purchase Plan

When it comes to your financial portfolio, diversity is key. Even if you have decent portfolio diversification, chances are good that the majority of your income comes from one source. If the company were to fail for whatever reason, not only would you be losing your income, but by investing in the company you work for, you could lose your savings as well. Obviously this is not something that anyone plans on, but it definitely could. That’s why it is a bit of a risk. In order to mitigate that risk, consider lessening the amount that you invest into your company. If given the option of an amount, don’t do the maximum.

Another risk would be that while the company might not tank, the stock still could. If you work for any business that has a high level of volatility, think twice before investing in your own company. While certain industries can rise in demand quickly, they can also drop in demand as well. Do some research on the industry, like you would any other stock investment, before you blindly sign over part of your paycheque. So before you enrol in the stock purchase plan, check with the plan to see how hard or easy it is to pull your money back out of the plan. Is it locked in for life? Do you have to pay a penalty to move it around or remove it altogether? Employees are often the first to notice when things start to go amiss. If you think there’s a chance that you could lose it all, pull it out before you do.

Benefits of a Employee Stock Purchase Plan

Regardless of the risks, it can often be a good idea to take advantage of your employee stock purchase plan. The most obvious benefit is that it can be a fantastic return on your investment. Unlike some banks or stocks, your purchase of company stock is often matched at a percentage. It can be anywhere from 20 to 100% match. That’s an almost immediate return that you cannot find elsewhere. It is free, guaranteed money, and often times it would be foolish to not take advantage of it.

Another fantastic benefit is that your company may purchase stock at a discounted rate. Meaning when you do sell your stock, you are getting an even higher rate of return. Or, even if the company’s stock does drop a little, you already purchased it as a discount, so that you haven’t lost anything. You just didn’t gain as much. It’s like a built in fail-safe that can give you peace of mind over investing into the stock market. As a final bonus, should the shares go up in price, when you sell it’s like the icing on top of an already sweet cake.

Does your employer offer a stock purchase plan? Do you take advantage of it? Why or why not?

Employee Stock Purchase Plan originally appeared on Canadian Finance Blog on October 20, 2011.