In Investing in Stocks for Beginners: How to Start Investing, you learned how to get started as a beginning investor. But you probably already realize that investing in stocks for beginners can take on a variety of forms. If you work for an employer that offers investment options, it’s important to take a close look at each of those offerings.
How Employer Stock Options Work
For an employer, stock options are a great way to build a fully engaged, productive staff. It can be used as one of the benefits they offer as part of a salary package, potentially luring top talent away from competitors. But employees with stock options are invested in the company’s success, making it more likely they’ll put their heart and soul into the work they do.
Employers that offer stock options will let you purchase shares at a predetermined price. You may be issued a certain number of shares, along with additional shares that will vest at a series of future dates, known as the vesting schedule. You can monitor the performance by watching the stock market or using an app like Vanguard Beacon, which helps you monitor your stock market performance on your mobile device.
How Stock Vesting Works
You’ve probably heard of “vesting” in respect to retirement savings accounts. Stock vesting is set up to get similar results. It incentivizes you to stay with the company by promising future rewards for your years of service.
If you’re allotted 500 shares on the day you accept the job, with an additional 250 promised after each subsequent year, that’s a vesting schedule. Schedules can be even further complicated. You might, for example, be given 500 the first day, 250 after the first year, another 250 after the fifth year.
Vesting schedules typically also come with an expiration date. That’s the date you’ll no longer be allowed to purchase shares in the company at the agreed-upon price.
Read More: What Does It Mean to Be 100% Vested in My 401(k)?
Benefits of Employee Investing
Just because you can purchase stock in your company doesn’t mean you should. But there are some definite benefits to buying your employer’s stock. They include:
- Discounted price: This is perhaps the biggest benefit. Employers will sometimes give you a discount for purchasing through your Employee Stock Purchase Plan (ESPP). This discount can be as high as 15 percent.
- Automatic deduction: If you prefer to “set it and forget it” when it comes to investing, participating through an ESPP can be a huge convenience. Your employer can automatically deduct the share price from your paycheck and make the purchase for you.
- Reduced taxes: The income you earn on your stock purchases can be taxed at a lesser rate than your other income, provided you hold it for more than a year. If you wait until at least a year after you purchase the stock to sell it, you’ll qualify for long-term capital gains rates, which are significantly lower than ordinary income rates.
- Personal engagement: The biggest benefit to you is the same benefit your employer gets. Owning stock in the company invests you in its outcome. If the business succeeds and stock prices rise, your investments will pay dividends, which will further motivate you as you go to work each day.
Read More: Can I Cash My Employee Stock Options?
Drawbacks of Employee Investing
There are a few downsides to investing in shares in the company that employs you. They include:
- Poor performance: Ideally, your business’s stock will do well, but you have little control over that. Even at a discount, if you purchase shares in a company that’s struggling, you’ll lose money.
- Failure to diversify: One of the basic principles of investing is to diversify. That way, if one stock does poorly, you’ll have plenty of others to pick up the slack. Buying too much of your company stock might mean your portfolio won’t be as balanced as it needs to be.
- Temptation to stagnate: Vesting schedules help companies reduce turnover. But it might not be in your best interest to stay with the same company for one, two or five years. Waiting for your shares to vest could lead you to stay in a job that you wouldn’t otherwise.
Read More: Buying One Stock vs. Diversifying Your Portfolio
Tips for Employer-Provided Investing
There is a happy medium between investing in your company’s stock or saying no altogether. You can go into it fully informed and prepared to monitor your results. Here are some tips to help you increase your chances of success:
- Set goals: You should have a goal in mind for your savings and investments, including those provided by your employer. Apps like Betterment can help you set those goals and monitor your progress toward reaching them.
- Look at it objectively: Is the stock a good one? Research its past and anticipated future stock performance and continue to monitor it if you choose to invest. Would you still buy shares in your company if you didn’t work there? If not, consider whether it’s a wise investment.
- Diversify: If you choose to invest in your company’s stock, make sure you aren’t putting all your eggs in that basket. Ensure you have savings for emergencies, retirement savings and an investment portfolio that minimizes risk while also helping you work toward your goals.
Employer-provided stocks often introduce new investors to the return that can come of purchasing stocks. But it’s online part of a valuable strategy. Investing in stocks for beginners also means researching your investments and understanding your risk.
- Investor.gov: Employee Stock Option Plans
- 20 Something Finance: Capital Gains and Selling Employee Stock: What You Don’t Know Can Hurt You
- U.S. News & World Report: Why Diversification Is Important in Investing
- NerdWallet: How To Research Stocks
- Internal Revenue Service. "Publication 525: Taxable and Nontaxable Income." Accessed Aug. 20, 2020.
- PwC. "Stock-based compensation," pages 3-252. Accessed Aug. 20, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.