Many companies across the world include an employee stock purchase plan (ESPP) as one of their employee benefits, but not everyone knows exactly how they work and how they can be profitable.
According to Wealthfront, an ESPP allows an employee to buy shares of their publicly traded company's stock at a discount via payroll deductions. Once the employee has signed up for the program, those deductions will accumulate in an individual account until the company purchases shares on their behalf. Purchases usually occur every six months, but there are other variables involved that will help determine exactly how much money can be made.
A typical scenario involves an offering period that includes one or more purchasing periods. This helps provide the best possible purchase price by allowing the employee to buy at the lower of the two. Let's say that the company's offering period starts on January 1 and ends on December 31 and there are two six-month long purchasing periods with a 15 percent discount on the price. Further assume the stock price is $100 on January 1; $90 on June 1, (six months later); and $95 on January 1 of the next year. On June 1, the employee could buy shares for $76.50, which is 85 percent of the $90 price. Because the program allows for the purchase based on the lowest price during the period, there is a lot of flexibility to take advantage of during the purchasing periods. All of these perks mean that it is very easy to gain a high return if the company does well and much harder to lose money even if it does poorly.
Despite the fact that it's so easy to earn a profit through an ESPP, many employees simply aren't signing up for the plans, according to Forbes.
One study by Fidelity Investments looked at the ESPP's across 239 businesses and found that employees were forfeiting over $7 billion dollars every year by not taking advantage of the program.
One drawback: overexposure. For employees who faithfully contribute to their plans each year, they run the risk of having too much of their investment portfolio in one company. If that company were to run into trouble, they could stand to lose a lot of hard-earned money. For this reason, some financial experts recommend selling the stocks for a profit each time they are purchased to lock in the profit and invest the money elsewhere.