Comments on: Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal

By: TFB

TFB — Mon, 06 Oct 2008 16:29:55 +0000

Miguel – No I don't know anything about companies buffering the effect of employees selling shares acquired from ESPP. Depending on the trading volume of the company's stock, what employees sell can be a very small percentage of the overall volume even if all employees sell right away.

By: Miguel

Miguel — Mon, 06 Oct 2008 16:07:36 +0000

TFB – great article – I encourage my friends to take advantage of ESPP for just these reasons, even though our company has just changed things up a bit recently. We get a 15% discount off the period-end price only, no looking back to the start price anymore. That said, I've seen share prices fluctuate (ok, drop) dramatically just after the ESPP buy date, perhaps caused or aided by a flood of selling immediately after all my colleagues and I take control of new shares. I remember reading somewhere that companies with ESPP plans are supposed to buffer this effect somehow. Do you know anything about that?

By: Peter Answers

Peter Answers — Sun, 01 Jun 2008 01:20:00 +0000

It takes about a week for the shares to actually hit my account, and that week where your shares have been bought but you can't sell them define your risk window. I eliminate this risk by shorting the shares right away and then covering when the shares hit my account. It is lock solid, no risk, guarenteed return. As long as you are allowed to sell your shares right away, you are a moron for not taking out the absolute maximum you can. If you cant afford the money taken out of your check, borrow it.

By: Anonymous

Anonymous — Thu, 13 Mar 2008 14:44:00 +0000

Thanks. I actually had some communication with Kaye Thomas about my issue. Her site is a great resource; I think I will buy the book.

By: TFB

TFB — Thu, 13 Mar 2008 06:57:00 +0000

Fairmark has very good writeup on the tax treatment of ESPP dispositions. Please note the two links in the end of that article with more detailed info on both qualified and non-qualified dispositions.

Their book Consider Your Options covers both stock options and ESPP. It is an excellent resource.

By: Anonymous

Anonymous — Wed, 12 Mar 2008 15:28:00 +0000

I wonder if you can give an opinion on some tangled up issues with my ESPP. (I have totally screwed up by treating these shares as regular stock.) I've been transferring shares for several years into my son's ugma account (using gift-splitting with my spouse in some cases). I've only now realized that I need to declare income on the 15% discount for qualifying dispositions. Do I also need to declare a long-term capital gain at the time of gift? I thought the stepped up cost basis (original cost plus declared ordinary income) would be passed along to him as with typical gifts of stock. Thanks in advance for you help. I enjoy reading your blog.

By: TFB

TFB — Sun, 30 Dec 2007 22:38:00 +0000

Time and the rate of return are related. If it takes 1 year to earn 5%, it's 5% rate of return per year. If it takes 10 years to earn 5%, the return is a lot less. Same with time frames shorter than 1 year. If it takes 3 months to earn 17.65%, the rate of return is a lot higher than what you'd earn if it takes one full year to earn 17.65%. With your CD example, if the CD allows you to deposit $100 a month and then gives you $1,260 at the end of the year, the return is a lot higher than a CD which asks for $1,200 up front and gives you the same at the end of the year.

By: Anonymous

Anonymous — Wed, 26 Dec 2007 14:47:00 +0000

This math in this article is crap. ESPPs are excellent, but not for the reason quoted in the article. The 90% annualized return is ficticious and over-hyped (its even bolded and colored red to draw attention). It seems to be intentionally misleading (or even worse, unintentionally misleading). You may think quoting an annualized return is useful, but it is absolutely incorrect to apply it in this context. Using XIRR() and quoting the 90% return is reckless and dangerous to your readers.

The fact is you get a 17.65% return after 6 months of investing. You can't arbitrarily say your money was tied up for 3 months on average and then annualize the 6 month figure by raising it to the 4th power! Furthermore, there is no compounding effect from ESPPs, you recontribute the next 6 months. At least use your math within the framework of the ESPP. The reality is that you get 17% return on half your dollars after 6 months, and then 17% return on a different half of your dollars, 6 months later. This equates to a 17% annual return.

Imagine a 12-month CD with return of 5%. You can't say that on average the money was tied up for 6 months, and then use the year end 5% return to calculate an annualized return from the 6 month point! This would be like saying 1.05^2 is your annualized return .. but we already know the real annual return is 5%!

To further prove my over-hyped point, assume a single payment of -$255 on 1/15/2007 that you can immediately flip on 1/18/2007 for $280 (with $17 cost, $20 sale, and $20 commission like your example). Using Excel's XIRR() on that produces an annualized return of 8746485%! Amazing right? Well not really .. it doesn't mean anything! I suppose it would be more credible if I colored it red and bolded it.

By: Anonymous

Anonymous — Mon, 29 Oct 2007 02:56:00 +0000

Great article, very useful. I just started with a new company and learned about their ESPP. Instead of a 6 month purchase period, however, I've been told the stocks are bought monthly and contributions are met by the employer on a monthly basis by 25%. In this case, when would be the best time to sell?

Thanks!

By: TFB

TFB — Thu, 14 Jun 2007 23:47:00 +0000

The math is correct. You get this opportunity to earn 17.65% in exchange for tying up your money for 3 months. Even if you only get this opportunity once a year, the annualized return on the opportunity itself is still ~90%. The fact that you get to do this twice a year only means you get to earn ~90% annualized on more dollars. Adam in comment #2 said it should've been even higher at 98%. I made a spreadsheet for bi-monthly payrolls and I also added a $20 commission for the sale and 3 business days settlement delay. It came out to 87% annualized when everything is taken into consideration. You can look at the spreadsheet if you are interested.

~90% annualized versus risk free return of 5-6%, both taxable, I'd take the former any day. I wish I could do this on 100% of my salary.