Invest in what you know. It’s a common investing adage, and employees might think they know their employer better than anyone else. But should you invest in your company’s stock?
Owning a stake in the company you work for might have some advantages. You might feel optimistic about your employer’s future and want to share in the wealth. As an employee, you may even be able to purchase stock at a discount. However, there are risks you should consider.
A key risk is overconcentration. It’s never smart to put too many of your eggs into one basket, and investors generally should aim to have a diversified investment portfolio. That’s especially true when it comes to investing in stock in the company that employs you. In the event your company falters, not only might your investments tumble, but you might also find yourself out of work at the same time.
Still want to own some shares in your company? Read on before doing so.
How Might I End Up Owning My Company’s Stock?
You might have an opportunity to buy or receive shares in your company either as part of your company’s retirement plan, or through an employee stock purchase plan (ESPP) or employee stock ownership program (ESOP). Your company also might offer employer-matched retirement contributions in the form of company stock or award you a bonus in the form of stock or stock options.
If you receive company stock as part of your compensation or benefits, by all means, take advantage of the free stock. However, if you’re compensated with stock or stock options, be particularly mindful of the benefits of diversifying your portfolio. Loading up on company stock in a taxable investment account while also allocating a percentage of your 401(k) to company stock can leave you underdiversified.
If I Own Company Shares, Can I Sell Them When I Want?
Maybe not. Within your 401(k), your company might place restrictions on your ability to buy or sell the stock, or transfer it to another type of investment within your retirement plan.
Employer-matched stock, in particular, often comes with restrictions. Some companies require employees to hold the stock until they reach a certain age or until a specified date. This might cause problems for you. If the stock slides, you might be stuck on the sidelines without the ability to sell and limit your losses.
Lockdowns or blackouts can also occur. These are periods in which account activity is frozen, generally to perform administrative tasks. Usually lockdowns are for a short period (a few days to a few weeks), with employees given advance notice.
When it comes to qualified ESPPs, there are rules associated with how much you can purchase and the timing of the sale of shares. Read your company ESPP information carefully, and consider consulting with a tax specialist to understand how tax rules might impact your returns.
How Much Company Stock Is Too Much?
There’s no single formula or percentage that suits all investors—and, as a regulator, FINRA cannot provide that sort of advice. Some experts recommend investing no more than 10 percent of total investment assets in a single stock, including stock of your company—and that could be too high, depending on your goals and circumstances. It's also wise to review your asset mix at least once a year, rebalancing if needed. You might want to consult a professional about what the right mix of investments is for you.
The bottom line: Owning company stock might allow employees to share in the financial success of a company, but it also carries the risk that your employer's financial problems will become your financial problems. Be smart about the degree to which you’re willing to tie your finances to a single company, even if its prospects look bright.