You may be having several friends who have invested in their own company’s stock. It is a common idea anyway. You know your company better and, therefore, investing in it is a logical idea. Perhaps your company has even offered some incentives motivating you to invest.
But how safe is it to buy stocks in the company where you work? Sometimes it is secure, and sometimes it may be risky. Well, no one can tell with certainty whether it is an excellent idea or a risky one. But must you invest to find whether it was a good idea or a bad one? Here, we will discuss some benefits and drawbacks of buying your company’s shares. Thus, you will be well informed before making the decision.
Advantages of Buying Shares in Your Company
Whether you are investing in stocks that pay dividends or options, you already know the company. This is a major advantage. Perhaps you even like the company. This might motivate you to invest. Here are other benefits:
Discounted Purchase Price
Most employers allow their employees to purchase the company stocks at a discounted price. You know, it is a way of giving you incentives to invest. Companies who sell their stock through the employee stock purchase plan allows up to 15% discount. It is a considerable discount.
Tax Break on the Profit
Let us assume the stock value rises and you have held it in more than one year. According to the terms, it is under the long-term tax rates on capital gains. What does this mean? It means that the tax rate is reduced and varies from zero to twenty percent.
Benefits on Options
If you are working in a stable company, buying options can be less risky as it can produce tremendous gains. You only need to study the past performance of the company’s share before investing. For strong companies, it almost always profits. Perhaps your employer offers you $30 per share and it goes for $60 per share. Is this not a good profit?
Good Revenue When the Company’s Stock is Strong
My company is growing strong and is profitable. If this is the case, you shouldn’t fear to invest in it. The stock is rising, so making the investment is a great idea. You will eventually make huge profits.
Drawbacks of Investing in Your Company’s Stock
Is your company’s stock a poor performer? If yes, it is a significant drawback. Thus, you should not think of buying the stock even if you work in the company. Your employer might be persuading you to invest. Well, invest only if you are comfortable with making losses. We know that you wouldn’t want to make losses. Thus, we have compiled other disadvantages of buying shares in your company that you must know.
What If the Company Falls?
Have you ever heard of putting all your eggs in the same basket? While it is not common, we have heard of companies that fell and their employees had invested in their shares. What does this mean? You do not only lose your job, but you also lose your investment. Thus, we advise against investing in the same place that you work.
It is Against Diversification
Investing in your company’s shares equals purchasing within your retirement plan, which overloads your company’s stock. In so doing, you end up with the same type of security, which is dangerous. Thus, a minor decline in stock price could have a detrimental effect on your overall portfolio. It would be best if you didn’t take all this risk.
The Investment Might Bind You to the Company
Let us assume that your investment is under a five-year vesting requirement, but you realize that the job isn’t working for you soon after investing. You will be left in a dilemma. You can’t leave the company you have invested in even though the job is not working for you. If you were wondering why employers give stock options with extended vesting periods, this is the reason. You will stay in the company longer than you could want.
Generally, there are advantages and disadvantages to investing in your company’s stock. While investing is a great way to make a profit, you must avoid holding too much of company stock as it is very risky. A small fall of prices can ruin all your stock. Therefore, it is advisable to consult an investment advisor to know the best suitable options for you before investing.