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Invest In Your Company

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This is a Devil's Advocate post.

It’s generally recommended that you don’t invest in your own company because you don’t want to put all of your eggs in one basket. You already have your livelihood pinned on the success of your company, why would you want to put part or all of your investment dollars in with the same company when there are so many others to choose from?

You Understand Your Company Better

When you decide to invest in a company, you probably want to do a fair amount of research into how they do business, how they earn money, potential risks, etc. I can guarantee, unless you’re a hot shot investor with inside connections or the ear of the CEO, you can’t possibly understand a company better than you understand your own company. You know that the Human Resources department was in shambled a few years ago and now the company has a dearth of talent in the 30-40 age range, which may result in potential problems down the road when that age range is looked to ascend into upper management. Or perhaps you recognize that they just ramped up their recruitment from top schools and are positioning themselves to be powerhouses in their industry in five to ten years. That’s insider information that isn’t illegal and could yield long term benefits.

It’s A Good Basket

If you bought 100 shares of Wal-Mart at $16.50 each when it debuted in 1970, you’d have 204,800 shares worth more than $10M. If that wasn’t enough for you, you’d be getting $122,880 per year in dividend checks. Incidentally, $1,650 in 1970 is worth approximately $8,607.90 today (to give you a real comparison). So, if it’s a good basket, why not put all of your money into it?

Employee Discount

Some companies offer an employee stock purchase program in which employees can get a discount on purchases of company stock, this adds a little safety buffer for investors because you’re getting stock at a discount to the street price. Now, there are usually rules as to how long you have to hold the shares but that’s just so you can’t turn around and drop the shares and make a quick profit.

No Faith In Your Employer? Leave.

If you don’t want to invest in your company because you don’t trust the company is growing or getting better at what it does, why are you working there? If it’s because you don’t have any other choice, you probably need to at least try to find a new employer – one that you believe in!

So there you go, three reasons why you should invest in your company… that being said, I don’t own shares of any company I’ve ever worked for (my current employer is privately held) because I subscribe to the idea that you shouldn’t put everything in one basket no matter how good you think it is. (hat tip to Ben for the idea)

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13 Responses to “Invest In Your Company”

  1. plonkee says:

    I think its one of those risk and reward things. You could do really well out of a company that you work for especially if you can get the stock at a discounted price. but the risks are much higher.

    There’s also a tendency for lots of employees not to see that the company they are working is going downhill. If you work somewhere you like, then you could easily view it with rose-tinted glasses.

  2. broknowrchlatr says:

    Great post. I’ve always had about 30% of my money in employee stock and never had an excuse to give people. This definately helps clear it up for me. If you truely believe the stock to be undervalued, why not have a large ammount of your savings in it. In any case, employers almost force you to have a lot of exposure to the company stock whith profit sharing, stock options, preferred stock. Companies also like to put the company match 401k contribution in their stock, giving you further exposure to it. I would go to the extreme of having all your eggs in 1 basket, but 30%-50% could be ok in some cases.

  3. Jeremy says:

    There is nothing wrong with investing in your employer as long as it doesn’t throw your long-term asset allocation out of whack. Clearly, investing a very large portion or all of your retirement savings into one company is foolish, but adding a little bit can be just fine if it is a good company.

    If you receive a discount and plan on being at the company long enough to take advantage of the holding restrictions then it is actually not a bad idea (provided you believe in the company and expect it to increase in value over the long-term). I had this option with my old employer and put a little bit towards company stock (5%). It faired quite well during the time I held it yet it was a small enough portion of my overall portfolio that the added volatility didn’t have much if any effect on my total performance.

  4. I would tend to avoid it as a general rule, but I have never worked for a public company when I have been in a position to invest in them or would have been interested in it.

  5. Matt says:

    There’s a lot to be said for it, actually…the trouble is, you have to work for a public company to do it. And at public companies, there are invariably, stuck in the chain of command in between the people who care about the work and the people who care about the business, dozens of layers of people who don’t especially care about either, and whose major incentive is empire-building, rather than productivity or profits. Middle managers, in other words…I make it a practice to quit working at any company that begins to show signs of developing them.

  6. Actually, you could be working in a great company, and fail to see the opportunities for investment… I think that would be a likely scenario, too.

    Kenneth

  7. Jesse says:

    When I first read the title, and saw that it was a DA post, I thought, “Well, who the heck wouldn’t invest in their own company?” But then I realized you meant as an employee — not an owner.

    So maybe the whole “all your eggs in one basket” thing breaks down a bit when you’re the founder?

  8. Cents You Asked says:

    The Pension Protection Act did some things to change this as many employees (and some above commenters) tend to agree with your “devil’s advocate” points. Congress is made up of mostly millionaires and they are telling us they don’t think it is a good idea for folks to invest heavily only in their own employer. New provisions were added to give all of us the ability to sell out of company stock whether we contributed to it or our employer did. There are still a few limitations, but in general the laws are more relaxed than most 401k plans were.

    I also did a breakdown of ESPP plans… they’re just not as good as them seem on the surface. Maxing out your other retirement options is a better use of funds!

  9. mari says:

    What if your 410k match depends on putting money into company stock? For example, a large company matches 1:1 in company stock, but only puts in half for other 401k investments (up to a limit of course). As a 20-something, how much of my retirement should I put in their stock? How much in other funds?

  10. Jeremy says:

    mari, this won’t be as much of an issue anymore. According to the PPA the new wording has been introduced into the law regarding employer stock: “Employer contributions invested in ‘employer securities’ must be available for diversification after participant has three years of service”.

    So while companies can establish a match program that uses company stock, they will have to allow you to diversify the funds accordingly after 3 years of service. And from what I’ve read, this is not a rolling three year period, meaning once you complete your service from there on out you can move the company stock into other plan options at a minimum of quarterly (depending on how the match is applied).

    It could still affect new employees without the required term of service, but at least the provision is there to eliminate company plans to force people to hold company stock that was given as a match.

  11. Peter says:

    Here’s an additional reason to own your company’s stock: My company requires that you own a certain percentage of your salary in company stock in order to receive a promotion. Investing in the company is investing in yourself.

    Thankfully, combined with a 5% discount, I earned 67% on the stock last year. (Probably a one-time deal though, related to a merger.)

  12. Star Money Articles for the Week of March 12

    Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Blueprint for Financial Prosperity recommends investing in your company. Consumerism Commentary discusses discounts at Kohl’s. AllFinancialMatters reads about …

  13. Hakimnia says:

    I think that low, mid, as well as upper level management should be “forced” to invest in their company in some “apparently” meaningful way. This will bring management that have work in only the best intentions for themselves as well as their company. This will reduce “faulty” economic game theory in today’s economy which I believe is the main reason for the drop in today’s economy.
    Why? Increases in computer technology reduce the need for education of today’s graduates that would control the major companies. The intelligent quotient of today’s management in my opinion could never compare the IQ of yesteryear’s management who would need a markedly superior level of education and intelligence just to do basic functions of management that are now done by computers. Game theory was great for these men who would compete in the market as well as the company buying and selling to fortify their position and title.
    Look at the job market where job listings are abundant for positions in bookkeeping and finance where students are routinely weeded out of the difficult curriculum. Forcing management to invest would put talented management to advance in position and title while weeding out inept management gamers.


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