Some public companies offer their employees the option to invest in company stock in their 401(k) or to purchase company shares at a discount price. Here’s all you need to know.
Purchasing company stock can be a benefit for many employees, and it is also an incentive for them to remain loyal to the company for many years. But there are some downsides as well.
You might remember stories about Enron, Lehman Brothers and other firms who went bankrupt and lost most of their retirement money.
Before you invest in company stock, there are certain things you need to consider:
1- You can get company stock for free or at a discount
There are many different ways in which a company can distribute stock to their employees. Sometimes, employees have the option to buy shares at a discount, some other times, they are given to employees as part of the compensation plan.
This is usually a nice incentive and, if the company does well, share prices will rise and this becomes a financial benefit for employees. But the same way, if the company performs poorly, you could potentially lose money.
2- Company stock should not be your sole investment strategy
As you have probably read before, the key to a healthy portfolio is diversification. If you put all your eggs in one basket, chances are you will face a bigger loss in case things go wrong. The purpose of investing is building wealth to enjoy your retirement, so if you don’t plan ahead and diversify your portfolio, you might end up with nothing. And as you get closer to your retirement age, you have less time to recover. So, while getting company stock is a good option, you should also consider investing in other products.
3- You already depend on your company
If your job is your main source of income, you already depend on your company a lot. Buying stock from them will make your finances more tied up with the company’s health. If the company is doing well, there’s nothing to worry about. But if things are not looking so bright, you might be in for a lot of problems.
If you accept company stock, make sure you diversify your portfolio, so your financial stability is not so strictly connected to your company’s health.