It makes a huge difference how big the company is, and how easy it is to sell shares. (I am also making the fundamental assumption the company is public, if it is not then there is no guarantee at all you can ever sell the shares). If your company is traded on a major exchange, and there are lots of shares traded per day, the it is likely you will be able to sell them when you need to at a competitive price (subject to any restrictions they place on you as an employee to sell).
Large publically traded companies in the US call this an “Employee Stock Purchase Plan” and if this is offered as part of an ESPP, then the company is likely large enough to count.
Then, there is a separate matter of whether the company is a good investment at all. And even if it is, you may not want to invest in your employer at all, because your salary is already tied into their performance, and you may not want to tie your investment strategy in to the same company. However, there is nothing preventing you from selling ESPP shares as soon as your company lets you do it after purchase, and if you do that you can get an immediate guaranteed return, with very little risk. You will have to pay taxes on your profit, but not the money you put in to buy shares.
It makes your taxes a little more complicated, but not overly so, and you may clear enough to pay an accountant to do your taxes anyway.
The company is pretty large and well-known around the world. And this was labelled as an ESPP. The problem is that I can’t exactly discern if this is a worthy investment, considering my inexperience. Could you let me know what should I look out for?
You would be evaluating the company just like any other individual stock, which means looking at its revenue, profit, debt, cash on hand, and other financial metrics. As well as its business model, and whether that business has any growth potential. But at the end of the day, the price is driven purely by how much other people want the stock in rhe market. I don’t mean to discourage you from Learning about it if it interests you, but there are a ton of financial planners and analysts who make this their career, and are still wrong often.
If I were in your shoes, I would put in as much as you think you can afford over the term of the ESPP buy-in, and then simply plan to sell them all once as soon as you can. They will take all that money, and buy shares with it at the discounted price, and then when they hit your account, they will be “worth” the current price. The price you sell them at will differ a small amount from the price they were issued at, because the market will have moved in that time. The difference between the discounted price and the current price will show up on your W2 as income, and you will have to pay tax on that, which may eat into your refund little bit. But not only is that difference free money for you (after taxes), but you get back all of what you paid in, making it a form of forced saving. And it may be enough of a bundle of cash that if you still wanted to invest you could then buy an index fund which will still go up and down with the market but has less risk if any individual company underperforms.
Edit: just realized you said you were in the EU, I think all the ESPP rules are similar, but possibly in Metric instead. :)
If you’re purchasing shares at a discount that you can immediately sell at full price, that is effectively free money.
Whether you want to hold those shares over a longer term is more complicated. 1) do you think the company is going to be more successful than its competitors? 2) do you think the industry as a whole is healthy and growing? 3) are you comfortable having savings and job dependent on the same organization? (i.e.: if the company has a big loss, you may lose your job and the value of your stock/savings will go down at the same time)
If you’re not comfortable answering the first two questions, then you may want to consider buying the discounted shares, selling them immediately, and putting the proceeds into some kind of diversified index fund. Index funds are popular because they diversify around the losses (and successes) of individual companies and individual industries, and bank on the general phenomenon of long-term economic growth. i.e.: population increase and new products.
ESPPs are a great way for the company to get employees to care about share price and get emotionally invested in the success of the company. They’re a great way for companies to provide additional compensation to employees (and the executives who put the plans in place) without having to call it salary, which often has tax benefits for both the company and the employee.
I agree with this view. If there is no minimum holding period or a very short period that you are comfortable with, buy as much as you can afford and sell immediately for a quick profit.
With a holding period, you are now speculating that the price won’t drop more than the discount. I was very disappointed when my company added a 1 year holding period, but it is a large, stable company with minimal volatility, so I’m continuing to participate.
Holding beyond that, you need to evaluate it as an investment outside your work relationship. Based on what you know as an investor, would you buy and hold shares? What % of your portfolio would you allocate to a single investment? I recall a lot of employees were wiped out when Enron and Worldcom went out of business. They both seemed like great companies until everyone found out about their fraudulent financial statements.