Reviewing employee stock purchase plans
An employee stock purchase plan (ESPP) is a plan that lets you buy stock in your employer's company. Often, the stock can be bought at a discount. Each ESPP is unique. If your company offers an ESPP, here's what you can expect:
- Purchases are usually set up through a paycheck deduction.
- You usually must sign up by a certain date, and your shares must be purchased during a certain period, known as the offering period.
- Typically, you must agree to have one to 10% of your pay deducted for ESPP purchases.
- The money that is deducted from your paycheck will be held until the end of the offering period. At that time, the funds you have accumulated will be used to purchase stock.
- You may have the option to cancel your purchase and have your contributions refunded. Cancellations must usually be submitted one or two weeks before the end of the offering period.
Investing in an ESPP
ESPP investments can be particularly beneficial for two reasons:
- Contributions are deducted from your paycheck, so they accumulate automatically.
- Stocks are often sold at a discount-as much as 15%. The discount is equivalent to extra earnings on your investments.
Your decision to invest should factor in the amount you have available for investments. In general, your first priority should be to contribute enough to your retirement plan to receive the entire employer match. After that, you may choose to max out your retirement contributions, including IRAs, to benefit from tax savings. If you have additional funds to invest, your ESPP may be a good option. Do your research
first to learn whether your company's stock is a good investment!