Wealth from Company Stock

Wealth from Company Stock

November 17, 2020

What do 7 out of the top 10 richest Americans have in common?  Their wealth came from ownership of their company’s stock.

Great fortunes have been made (and lost) by owning concentrated stock positions in your company’s stock.

So, should you invest in your company’s stock?

Employee stock programs give you an opportunity to directly own the company and help you to benefit from the success of the company. This can be a smart move if the business is growing, however; if the company’s prospects aren’t too good then you may want to invest elsewhere. How can you tell?  Review the company’s stock price against an index or like companies.  That will tell you how the stock is performing.

You don’t want to avoid getting caught with a losing stock over time.  In New Jersey, there were a lot of folks who owned Lucent Technologies.  They were millionaires and held onto the stock as it continued moving down and they never realized their fortune. Alternately, you have a lot of individuals who have made million from companies like Amazon and Google and Microsoft. .

If your company is strong, you need to review what type of stock purchase program your company is using. Following are five different ways companies enable staff to own stock in the company:

  1. Employee Stock Option Plans (ESOs): these give the employees the right to buy the stock at a specified price within a finite period of time. These can be very lucrative if the stock price spikes above the granted price. You would only own the stock and exercise these options if there is a profit, so there is a lot of upside to taking advantage of Stock Option Plans.
  2. Restricted Stock Grants (RSU): these give employees the right to acquire or receive shares once certain criteria are attained, like meeting performance targets or working for a defined number of years. They can also be forfeited under certain conditions such as failure to meet performance goals or termination of employment. This is also a great way to own stock in your company.  You need to review the price of the stock and if it is profitable to acquire the shares then do so.
  3. Stock Appreciation Rights (SARs): SARs link employees compensation to the company’s stock price during a predetermined period. The employee gains when the company stock price rises. Unlike ESOs, employees do not need to pay an exercise price.  This increase in stock value from the granted price value is payable in cash or company stock.
  4. Phantom Stock: pays a future cash bonus based on a designated time or event in the future and equal to the value of a defined number of shares as per the contractual agreement.  No legal transfer of share ownership usually takes place, although the phantom stock may be convertible to actual shares if defined trigger events occur and often a cash bonus is given in lieu of stock. This is like a company stock linked bonus.
  5. Employee Stock Purchase Plans (ESPP): these plans give employees the right to purchase company shares, usually at a discount.  These can be combined with qualified plans like 401(k)s and normally employees buy stock each payroll period. Normally, you get an automatic rate of return on these types of shares as you are buying at a discount.

All of these programs give employees the opportunity to share in the company’s growth and success. Exercising options is always tricky as it can be a way to lock in gains and diversify assets, but you may be passing up future growth of the stock if you sell the shares.  It is a balancing act that is never perfect. In addition, it is important to consult with a tax professional to determine what your tax liability may be.

In future articles, blogs, videos and presentations we will be further exploring company stock programs.

The price of company stock can be very volatile and your entire financial plan and future should not be dependent on your company stock.  Make sure you work with a financial advisor to ascertain best strategies going forward as you don’t want all of your eggs in one basket. If you need help planning and preparing feel free to call us at 732-224-9900.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification odes not protect against market risk