Can You Invest in Your Own Company’s Stock?
Written by
John Csiszar
Edited by
Amber Barkley
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If you’re happy at the company you work for, one of the ways you can show support for it is through buying stock. Owning stock will give you an ownership stake in your company and allow you to participate in its future upside. The good news is that there are a multitude of ways to invest in your own company’s stock, although the process might vary, depending on whether or not it is public or private.
Here are the main ways that employees can purchase employer stock, along with a look at some caveats to consider.
401(k) Plan Purchases
One of the most common ways that employees pick up shares of employer stock is through a 401(k) plan. In addition to the usual mutual funds and ETFs offered in 401(k) plans, employers will offer employees the option of investing in company stock. Matching contributions may also be offered in the form of company stock.
Just be aware that stock purchases in a 401(k) plan might come with some restrictions. For example, you might not be vested in employer matching contributions for a number of years, preventing you from selling the shares, even if they are falling.
Employee Stock Purchase Plan
Employee stock purchase plans allow employees of publicly traded companies to buy company stock at a discount, typically in the 5% to 15% range. ESPPs can be complicated, so you’ll want to read through all of the fine print before you participate.
Depending on whether your ESPP is qualified or non-qualified, there will be different restrictions as to how and when you can buy employer stock, what your discount is and when you can sell your shares. There can also be complicated tax consequences, depending on the specifics of your plan. But if your employer does offer an ESPP, it’s another way that you can invest in your own company’s stock.
Open Market Purchases
Whether or not you’re invested in your company’s stock via an employer plan, you’re free at any time to make purchases on the open market — at least, if you work for a publicly traded company. If so, you can buy or sell as many shares as you want any time the market is open, just like any other investor could.
Note that with open market purchases, you won’t get any benefits from your employer, such as a matching contribution or a tax-advantaged plan in which you can buy the shares.
Employee Stock Ownership Plans
Employee stock ownership plans are similar to employee stock purchase plans, but they have important differences.
For one, employee stock ownership plans, or ESOPs, allow employees to buy shares of privately held companies. An ESOP is a qualified retirement plan, like a 401(k), but it holds privately held stock shares in trust for the benefit of individual employees.
ESOPs are often used to help retiring business owners transition ownership to their successors, but it’s also used as a benefit for rank-and-file workers, to give them some level of control and ownership in a company.
If an employee with shares in an ESOP leaves the company, they are entitled to whatever vested shares they own. At that point, the company must buy back the shares, if they are still privately held. Thus, in most cases, employees with shares in an ESOP are ultimately paid in cash if they leave the company.
Caveats to Owning Too Much Employer Stock
Owning employer stock can be a good thing, as it reflects your dedication to your company and allows you to participate in the upside profits when it grows. The main danger from investing in employer stock is oversaturation.
If you allocate your entire 401(k) balance to your company’s stock, your entire financial life is now in the hands of your employer. If the business fails, you’ll likely lose not just your job, but also your entire life savings. This is a big risk to take just because things seem to be going well at your company currently.
Most financial advisors recommend diversifying your investment portfolio and not putting all your eggs in one basket, and this is particularly true when it comes to employer stock.
The Bottom Line
Whether the company you work for is publicly or privately held, there are likely many ways that you can invest in your own company’s stock. In some cases, you’ll get tax advantages or discounts that can make the purchases a good deal.
However, as with any investment, you should take your entire financial situation into account when determining just how much employer stock is “too much.”
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