In US, employees of a corporations can often purchase the stock of that cooperation with 5 to 10 percent discount based on the generosity of the corporation. The contribution take place through the pay checks and there is a limit for that which is usually up to 10 to 20 percent of the employee's paycheck.
ESPP is a good way of saving and investing money and except for a very volatile stocks (which usually the big corporations stocks are not), it can guarantee growth of money if you don't risk on that and follow my simple strategy of:
"Sell ESPP as soon as it is vested!"
Here is the reason:
Suppose your contribution to ESPP is 400$ per two weeks paycheck. And you are working for a stingy corporation that the discount rate is only 5%.
Then the contribution after 6 month would be 4800$ and the number of share that you can purchase through ESPP would be 4800/(Stock Price * 95%). If you sell the shares immediately you can earn (stock Price*4800)/(Stock Price * 95%)=5053$. That means 5053-4800=253$ profit or 5.3% profit in 6 months which is a reasonable investment. However if you keep ESPP for future sell there is no guarantee of the profit and the stock market fluctuation plays a main role there.
Other good thing about ESPP is saving money. By putting aside some money each paycheck, you can save a lot after 6 months and also please note that the money is deposited to ESPP account gradually and the it is not parked there for the entire 6 months.
I am going over the ESPP tax consequences in the next post ...
Cheers,
HTP
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