Get Free Money – Use Your ESPP

One of the most awesome employment benefits you can have is an Employee Stock Purchase Plan. Most of the time, contributing to them is the equivalent of getting free money. Most of these plans give you a discount on the price and many have a look-back provision that makes them even sweeter. Buy one day. Sell the next. Make 15%.

ESPP Basics

Employee Stock Purchase Plans are programs that allow employees to buy stock in the company they work for, usually at a discount. They all have their own rules set by the company, but there are usually commonalities among them:

  • Provide for a discount on the price. The discount will vary, but 15% is not uncommon.
  • Have a look-back provision. A look-back sets the your purchase price at either the day the purchase cycle ends or the day it began, whichever is lower. In other words, if your plan runs every six months, you’ll buy at the lower of the January 2nd price or the June 30th price.
  • No restrictions on how long shares must be held. This one is key. Ideally, you can sell the next day. Sometimes the transaction takes a few days. Worst case, you have to wait for several months.

Take the money and run

Here’s how the free money works. It’s too simple. As soon after your program buys shares for you as you’re permitted to, sell them. At minimum, you make an immediate 15% (or whatever your discount is) profit. It could be even better using a look-back provision. In that case, it’s possible your discount (and hence, profit) would be even higher.

What I’m advocating is derisively called ‘flipping.’ Some people say it’s an abuse of the system. To which I have two things to say.

  1. They set up the rules. I’m just playing by them.
  2. Do you really expect me to keep an inordinate amount of a single stock, in the company I work for no less, in my investment portfolio? That breaks, like, rule number one of investing.

Our experience

My wife worked for a company that had an ESPP. The discount was 15% and it had a look-back provision. We took a slightly different tack than what I’m advocating here, simply for tax reasons. We waited until we’d held the stock for a year to take advantage of long-term capital gains tax. Though in retrospect, it probably didn’t make any difference because of our taxable income.

The beauty part is that, because the money for the ESPP came directly out of her paycheck, we never even missed the money. So every six months was another windfall. If I remember right, we used the bulk of it to pay for her MBA program.

Bottom line, if you have an ESPP available to you and you don’t participate, I think you’re a turning down free money. And turning down free money is dumb.