What You Need to Consider before Investing in Company Stock
Investing in company stock is a popular option that many people, especially those who work for large companies, like to add to their portfolios. When properly planning for retirement it’s important to thoroughly explore all options that can help you save as much as you can. Here’s what you need to consider before you start investing in your workplace:
How You Will Obtain the Stock If part of your company’s 401k match program is to match your contributions with company stock then not taking it would be like wasting free money, or if your company offers you company stock at a discounted rate then purchasing some might prove to make you a tidy little sum. Additionally, your company might offer you a certain number of shares at a pre-set price and allow you to exercise that option whenever you wish. If this is the case, keep an eye on the market price of the shares as you might be able to quickly double your money or more at any given moment. There might be a few ways for you to obtain some stock in your company, so make sure you’re paying attention to which ways can be most beneficial to your retirement nest egg. Just remember to not let yourself get carried away.
How Much Company Stock You’re Going to Have While having company stock be a part of your portfolio can often be a good thing, you should never let it be the only thing you have. Ensure you have a diverse selection of investments as putting all of them into one place could end with disastrous results. Enron employees who had heavily invested in their own company and then lost everything because of the scandal and bankruptcy are a prime example of why it’s a bad idea to hold too much stock in your own company. If something were to happen not only would you lose your means of income, but you would also lose the bulk of your retirement savings.
Your Tax Implications Where your stock is being held will determine what your tax implications are likely to be. If your stock is kept within a tax-deferred retirement account you could benefit from the net unrealized appreciation rule that is part of the federal tax law. Net unrealized appreciation is the difference between what you paid for the stock and what its market value is when you sell. The rule means that you only pay income tax on what you paid for the stock, and any profit you made from the sale would be taxed at capital gains tax rates which are typically a lot better for your wallet.