An Employee Stock Purchasing Plan (ESPP) is a company run program that lets employees purchase company stock. Usually at a discounted rate, both percentage-wise and using the lower of price of the first/last day of an offering period. Employees can make purchases through payroll deductions.
An example ESPP:
- employees may contribute up to 15% of salary or $25,000 (whichever is lower)
- offering periods will be 1/1-6/30 and 7/1-12/31
- 15% discount on purchased stock, where the price is the lower of the closing price on the first or last day of an offering period
For the example above, you could elect to deduct 15% of each paycheck. At the end of an offering period, your company would use your paycheck deductions to buy discounted stock. Once you have access to the stock, divest it by selling immediately.
- If you don't think you'll be able to sell your company stock immediately, consider not participating. It's risky to hold that much in a single company stock — let alone the same company you're employed by.
- Some ESPPs don't offer a discount. It's probably not worth participating if that's the case.
- Some ESPPs have lock up periods of months or even up to a year, where you cannot sell the purchased stock. It may not be worth tolerating that amount of risk.
Wealthfront's A Good ESPP Is a No-Brainer dives further into whether you should participate in your ESPP or not.
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