Employee Stock Plan

ESPP (Employee Stock Purchase Plan) is a type of stock plan that employees need to be most aware about. I missed a lot of earnings using this because I did not realize the importance of this plan.

Here is an example of how useful ESPP is and how you can earn good by making full use of Stock purchase discounts provided by company. 

EXAMPLE OF A QUARTERLY ESPP USAGE

Assume that you earn 

Salary = $100,000 a year

You elect to contribute 10% of your salary for quarterly Employee stock Plan

Your company discount for purchase = 10%

IN A QUARTER, say JAN 1-MAR 31, you will spend = $2500

SCENARIO 1 -PROFIT (STOCK PRICE IMPROVES AT END OF THE QUARTER):

Company Stock value on Jan 1 = $20

Company Stock value on Mar 31 = $25 (Stock value improves by $5)

Your Stock Purchase Price will be the lowest of Jan 1st Price and March 31st Price with 10% Discount

Your Stock Purchase = $20 * 0.9 = $19, per share

Now, you can purchase $2500 / $19 shares in the quarter.

Therefore, number of shares you purchased =   131

Now, on Mar 31 (or at a later date) you can sell the shares at $25, per share price

Selling Price = 131 * $25 = $3275

PROFIT You made in just 3 months = $3275 - $2500 = $775 (This is as good as a bank account with annual interest of 31%) . 

Yearly Profit at the same rate = $3100

SCENARIO 2 - LOSS (STOCK PRICE LOSES AT END OF THE QUARTER):

Company Stock value on Jan 1 = $20

Company Stock value on Mar 31 = $15 (Stock value loses by $5)

Your Stock Purchase Price will be the lowest of Jan 1st Price and March 31st Price with 10% Discount

Your Stock Purchase = $15 * 0.9 = $13.5, per share

Now, you can purchase $2500 / $13.5 shares in the quarter.

Therefore, number of shares you purchased =   185

Now, on Mar 31 (or at a later date) you can sell the shares at $15, per share price

Selling Price = 185 * $15 = $2775

PROFIT You made in just 3 months = $3275 - $2775 = $500 (This is as good as a bank account with annual interest of 20%) . 

Yearly Profit at the same rate = $2000

BOTTOMLINE

As you can see, in both SCENARIO 1 (PROFIT SCENARIO), you make 31% Interest and in SCENARIO 2 (LOSS SCENARIO), you make 20% Interest. So, it is better than putting money in bank. No need to worry much about stock price loss either.

The amount of profit from Stocks vary depending on

1) Company Stock Price Fluctuations

2) Employee Discount for Stock Purchase (It is typically around 10% to 15% depending on the company)

3) Other restrictions/rules in Purchase plan.

TAX IMPACT ON STOCK PROFITS

1) If you sell the stocks in less than a year, you will be taxed at normal rate like 35% on the profit

2) If you sell the stocks after a year or so, the taxation rate is low and will be around 10% on the profit.