How Much Company Stock Should You Hold?

by Kevin on July 30, 2009

Some of you are lucky enough to work for a company that offers you the option to buy company stock as a form of compensation. While this is certainly a nice perk — especially if the shares go through the roof — I think it is a very risky proposition.

How to Get Company Stock Options

You can’t control how to get stock options. Your employer has to provide some sort of plan that employees participate in.

Of course you could always target employers specifically that offer stock options or some other stock purchase plan. I just don’t think it is wise.

The Risk of Relying on Company Stock

Placing a large chunk of your investment portfolio into your own company stock is extremely risky.

Just think about it. You’re putting all of your money eggs into one basket.

While it is certainly within the realm of possibility that the company stock you own could double and earn you a ton of money you’ve got to think that is highly unlikely. If the stock is expected to perform well then the market as a whole will pick up shares and your ability to time your purchases to make a profit will be limited.

What if Your Company Fails?

This is the ultimate risk. You lose your job and your income. Big problem.

If you have company stock on top of that… it is suddenly worthless. Potentially huge problem if you had a lot of money in those shares.

You never want to put that my risk into one area of your life. You can’t afford to lose both your income and your investment portfolio. (Just ask the folks that used to work for Enron.)

How to Utilize Company Stock Options Safely

Sometimes you are given stock options and have to wait a certain period of time before you can convert them to stock. In this case I would allocate no more than 5% of my portfolio to the company shares. I would track when I would be allowed to sell the shares and sell at my very first chance.

Other times you’re given the option to buy the stock at a discount. In this case I would be a lot more willing to allocate money toward company shares. There’s one caveat: I want to be able to sell the shares within a very short period of time of buying them at a discount.

For example, if the company is trading at $50 per share you may get the option to buy shares at a 15% discount or $42.50. If I can turn around and sell the shares immediately I will pocket a 15% return (minus taxes) very quickly. I’m all for that.

But if I have to wait six months from the purchase date to sell? No thanks. There are too many things that could happen in six months that would put that money at risk. (Imagine being in this situation in June of 2008. Having to wait until December 2008 likely destroyed the value of the shares you want to sell.)

I don’t get company stock. I’m curious if any of my readers get opportunities to purchase their company’s shares. Are you holding a large amount of shares?

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{ 10 comments }

Jared July 30, 2009 at 11:35 am

At my company (United Health Group) I have the plan where I can put aside up to 10% of my pay check and buy the company stock at the end of 6 months at a 15% discount. I have always sold immediately, where else are you guarantied to get a 15% return in only 6 months. Though I have co-workers who never sell, and are always talking about how high the stock price once was and so it has to return to that level, and then they’ll be rich…

Golfing Girl July 31, 2009 at 7:19 am

Unfortunately, the year I became elligible for stock options, the price was sky high (about $18 higher than it is now) and the following year the cut my job grade from the program (along with many others). So it hasn’t done me much good. I have 5 years to exercise my options. I don’t really understand the plan very well since I only participated last year so thanks for the reminder to research what my options are.

Tonka Beans July 31, 2009 at 12:51 pm

If you can avoid it, don’t own any of your employer’s stock. It goes against diversifying your assets. Why have your wealth tied to the fortunes of a company when your compensation is as well?

Running Gator July 31, 2009 at 7:32 pm

You missed an important point of most company purchase plans I’ve seen. You buy shares of stock at 15% below either the price at the beginning of the six month period, or the price at the end of the 6 month period, WHICHEVER IS LOWER.

If the price has gone down from the beginning to the end, then you get 15% off the current price. If it has gone up, then you’re gain can be a lot more significant.

Kevin August 2, 2009 at 1:08 pm

@Jared: Yea there will always be some dreamers… why not be happy with a guaranteed 15% return?

@Golfing Girl: I’m sure you can use it to get some sort of financial advantage.

@Tonka: Good question. Not sure why anyone would keep throwing money into their own company stock without selling.

@Running Gator: And if the company goes under how much do you get? Again if you have a small percentage of your portfolio in company stock that’s okay… but the people who put their life savings into one company’s stock are complete bafoons.

LuckyOne August 3, 2009 at 12:58 pm

I started working for my employer in 1995 when our stock was in the single digits. I was granted 3000-4000 shares as part of my hiring and immediately signed up for a 10% employee purchase plan. Over the years, our stock has skyrocketed and split 3 times, making me a millionaire many times over, all because of my company stock.

My financial advisor hates it, since he always wants me to sell, sell, sell, but had I listened to him back in the 90’s, I would never be where I am today. I do diversify and have many other investments, but I will never regret the financial moves I made in the early days of my career.

Yes, I got lucky (very lucky) but I also worked very, very hard to get where I am today.

Kevin August 10, 2009 at 1:48 pm

@LuckyOne: Indeed you are lucky. Risk-embracing and lucky! As long as you realize you were indeed lucky — that there are many others that did the exact same thing you did, but ended up with nothing — then that’s fine.

Hard work has something to do with your career, but not necessarily to the price of your company’s stock. Congrats on your success.

Fianacial Dude November 12, 2009 at 12:41 pm

Asa financial advisor I have a client who has several thousands of dollars in Publix stock. It is in the 6 figures. Only employees and share holders can own this stock. This guy has no other investments. Publix has enjoyed a 16% average annual return since 1959 but having you money all in one basket is not a good idea.

Its a fantastic company, not much has beaten 16% average return. However, I am concerned about exposure and all his eggs in 1 basket. The S&P500 has FAR LESS risk than just 1 stock and it is up 210% over 20 years or 10.5%, so dont be fooled. That is an incredible return but its growth has exploded and is unsustainable at the same rate over the next 50 years. There can only be so many publix stores.

Needles to say we will be moving some money.

Kevin November 12, 2009 at 8:00 pm

Wow. No other investments and everything in one company. A good company, but one company nonetheless. That’s hard to believe.

Merrill Idiot February 23, 2010 at 11:29 am

Maybe I am an idiot, but I sold all of my Merrill stock (as an employee) when Merrill crashed in 4th 08 and converted to mutual fund. Then when ML stock became BAC stock, I sold the mutual fund shares and put all money in BAC stock. I think it was at 3.27, and in a year it is at 16.

Risk has its virtues, and I am about to sell the BAC today and pump back into diversified investments since BAC is adding 10% common shares for TARP. Perhaps I can pump it back in BAC (or some of it) for a rise. I think this is the most exciting period for investors in a long time since nobody is an expert in uncertain eras.

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