ESPP Employee Stock Purchase Plan: To Be My New Property Tax Escrow

You, Me, and ESPP

For a few weeks now my company has been touting their Employee Stock Purchase Plan (ESPP). I’m new to the company and have never participated in one of these before, so I really didn’t know what to think. I already have some company stock (via options) from when I was hired. In my opinion owning those options has been enough. You never want to own too much of one stock, right? Definitely not your own company. After all, being that I’m employed here, I’m already heavily invested in them.

15% Return? I’ll take it.

Well, a co-worker (who knows I love talking saving money) started talking to me about this plan and told me she was going to do it. She shared with me the basic concept. You make automatic contributions (between 1% and 10%) every pay period to a fund, that after six months is used to purchase company shares of stock at a 15% discount. You are then free to do whatever you want to with this stock. If you sell it that same day (called ESPP “flipping”), you simply make the 15% discount. Not bad for six months, right? That’s an annualized return of 30% less taxes. Nice. I’m not going to be getting that anywhere else. It’s actually more of a return if you look at it like this.

Can We Do This?

My thoughts quickly turned to my property tax self-escrow with ING DIRECT. Why not use the ESPP in place of the ING DIRECT account (currently earning 3%)? For the record, we have our emergency fund with ING DIRECT as well, so I wouldn’t be pulling ALL our money out of savings, just the property tax portion that I had set up in an extra account (contributing $350/mo.)

My next step was to do some actual, in-depth research on ESPPs and my company’s plan to be sure this was right move for Mrs. PT and I. You didn’t think I’d just blindly sign-up based on a few co-worker’s suggestions did you? I’ll share what I learned about ESPPs next week.

Other Thoughts on ESPPs

Here’s a very pro-ESPP post, ”the wonderful world of employee stocks” (@ Punny Money), which basically says at the 15% discount I’m getting, I’d be silly not to do it.

This article, “Cash in the Cubicle“ (@Market Watch) is also very positive in it’s overview of the ESPP.

A write-up (@Fairmark.com) called “Flipping ESPP Shares” discussed the ethics of doing ESPP flipping, which is what I’d be doing. Do you think this would be an “abuse of the benefit”? I really don’t.

Lastly, check out this read (@The Finance Buff) on employee stock purchase plans and how “ESPPs are a Fantastic Deal“.

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I went ahead and signed up for the ESPP today, as it’s the last day to sign up. I’m pretty excited about this benefit and I’m super glad my company rolled it out. Is anyone else using an ESPP to flip for a quick profit?

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Peter Answers

@PT - Sorry, I was using the royal "you" there, I wasn't calling YOU an idiot. :-) In terms of when to short you should short as soon as you know exactly how many shares you will be buying - depending on how your firm calculates that, you probably won't know this until after close of business on the last day of the period. However, if you wait until after the close you won't be able to put in your short sell order until the next business day, and osmething could go wrong effecting your stocks opening the next trading day, so what I do is wait until the last few minutes of the last trading day in the period and I make my calculation at that time, initiating the short sell right before market closes on the last business day. In my plan we get the lesser of 85% of closing price at start of period or 85% of closing price at end of period. When the stock is higher and you know you are buying at the price at the beginning of the period it is very easy to know with 100% accuracy what your buy price will be, and you know how much you contributed so of course it is an easy calculation. Depending on how much your stock price moves in a given day it is possible it is harder to get it exactly right if your buy price will be the price on that last day of the period, but even then you should be able to nail it and if you do miss by a share or two no big deal.

@good money blog - if you use the shorting method I have described there is no risk in losing money, you will have locked in the 15% (minimum) gain - the only risk is if the share price RISES and then you will lose out on that gain - but then you are just getting greedy! It makes no difference how volitile the stock is. Imagine you work for an Enron like company and on the last day of the period your company shares are priced at $60/share and you had invested $6,000 in your ESPP for that period. You know your company will be buying 100 shares for you so you short 100 shares and recieve $6,000 in cash from your broker. Then let's say something terrible happens that night and your company shares go down to $1. Doesnt matter to you (other than you may no longer have a job!) because you already locked in your gain - you cover your short sale with the shares you get a few days later from your company and you get to keep the $6,000 cash.

Obviouslly this example is grossly oversimplified, there are little things like margin interest expense, transaction charges, etc, but in general this simple approach means ZERO risk to ESPP:

Right before close of last day of period determine how many shares company will be buying on your behalf and then short that amount of shares. Once shares hit your brokerage, use those shares to cover your short position. Enjoy your stress-free, locked in profit. :-)

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Good Money Blog

That only works well for company stocks that are not volatile, don't you think? For a tech stock in a bear market, that almost guaranteed 15% could evaporate in a couple days.

Anyway, I did make some easy gain when my company used to have the ESPP program. At the time, I even thought about hedging the position (before it could be sold) by shorting it. I was told employees weren't allowed to short company stocks but I did think about asking my siblings to help me out.

@Peter - Thanks for your comment. I agree, do everything you can to make it happen. We set up for 10% and shouldn't have a problem making that.

Good point about the lag time between purchase and sale. I wonder how close to the purchase date I'll be comfortable doing the short sale?

Thanks for the vote of confidence.

If you are an employee who is allowed to sell your shares right away and your are not taking out the max on your ESPP then you are an idiot. If you think you cant afford to take 15% out of your paycheck then beg, borrow or steal the money you need to cover the expense, put it in a savings accoutn and pay yourself out of it every paycheck whatever you took out for ESPP.

One thing to remember is that there can be some risk - at the end of the period when your company buys your shares with your money it will be at least a few days before they hit your broker. That period of time where your shares have been bought but you cant sell them defines your risk window. You can move your risk to zero by shorting your shares once you determine how many will be bought, and then using the ESPP shares to cover once they hit your brokerage. In this way you really do have ZERO risk.

In public your CFO will say not to do this because he is paid to have you buy and hold, but in private they will ackowledge it is smart money management.