Why you should join your ESPP Plan - 2010 May 25

http://bit.ly/d5joyj

Many companies have an ESPP (Employee Stock Purchase Plan) that looks
something like this:



You pick a paycheck deduction between 0 and 15%. The company takes that
money and sets it aside for a set period of time (often 6 monthes). At
the end of the 6 months they give you stock for the money at a 15%
discount off either the current price or the price at the beginning of
the period. Many plans differ in their period, or have different caps
for how much you put in but usually they look something like that.



A lot of people skip this plan because 15% doesn't seem that amazing and
their budget is tight. If you do this you're probably making a big
mistake. If your plan allows you to sell on the same day you get the
stock the calculation in terms of interest rate goes like this:



-15% discount = 17.6% gain. (If the stock price is $1 you get it at
$0.85. If you had $100 that would be 117.6 shares)



-17.6% * 2 times per year = 35.3 (because it's only half a year)



-35.3 * 2 = 70.6% (Multiply by two again because on average your money
is only in there for 3 months)



So thats a guaranteed 70.6% rate of return even if the stock is going
down. If it goes up and you get it at 15% off the starting price you
can make a killing (and technically we didn't time-weight things
properly, the actual return is higher, see link below). Even if you
have credit card debt at 30% you can come out ahead (and pay off your
debt faster) by joining the plan.



More detailed explanation:

http://blog.adamnash.com/2006/11/22...t-more-than-15/



EDIT: Some confusion is being expressed below. The 70%+ rate annual
rate of return is correct (again, assuming you can sell on day 1 which
many plans allow). It makes no difference that the plan is capped, or
that it only lasts 6 months. 70%+ (the plus being better explained in
the blog posting I linked) is the rate the dollars in the plan are
earning while they're in there. To put this another way it's as if your
company is setting aside your $'s in a 70% APR account and then mailing
you the money every 6 months. Yeah it's a bummer they send it back,
but that doesn't change the rate.



The usefulness of that rate comes in when you are deciding whether to
put your money in this plan or not. You probably have these other
options with your money shown with rough rate of returns:



-2% APR, savings account

-6% APR, pay off your mortgage

-8% APR, historical average of stock market

-20% APR, pay off credit card debt

-70%+ APR, ESPP