TheStreet.com
The Pros and Cons of Owning Company Stock
Tuesday March 10, 11:48 am ET
ByBob Feeman, Special to TheStreet.com
Like many employees, you might have the option of purchasing stock in your company through your 401(k).
Many employers, like health care company Gilead Sciences, sweeten the deal by offering their stock at discounted prices. Others, such as FirstEnergy and Sempra Energy, offer matching 401(k) contributions in the form of company stock.
Purchasing your company's stock can have benefits for both you and your employer, but investing too heavily can have negative consequences. That's why it's important to understand the pros and cons of investing in your company's stock -- and to find the right balance in your 401(k) assets.
The pros: One of the best reasons for investing in your company's stock is that it gives you some sense of control over your own financial future. When you feel you have a personal investment in a company, you'll work harder to ensure its success, and you'll feel a greater loyalty to it. If your efforts pay off and the stock rises, your financial stability rises with it, especially if you purchased the stock at a reduced rate.
There are benefits for employers as well. Offering stock options helps companies recruit better-qualified candidates, and motivates current employees to perform at the top of their game. Employers who offer stock options also find less turnover and better morale among their work forces, according to a 2000 report by the National Commission on Entrepreneurship.
The cons: On the flip side, owning too much company stock can have its drawbacks. Just ask the employees of Enron, WorldCom, Lehman Brothers and even General Motors. By investing heavily in company stock and depending on the same company for your salary and benefits, you're essentially staking your financial security on a single firm. Should the company hit a shaky spot, your financial future can start to tremble as well.
In addition, some companies place limitations on how much stock you can buy and sell, which limits your ability to freely manage your assets, especially if the stock should start to slide. (However, federal legislation passed in the wake of the Enron debacle mandates that companies that match employee contributions with company stock must allow employees with three or more years of service to transfer the company stock's value into other investments.) Other companies have placed a cap on how much company stock employees can hold through their 401(k)s.
Still, a December 2008 report by the Employee Benefit Research Institute found that about 8% of employees have more than 80% of their 401(k) assets tied up in company stock, and 19% of employees over 60 have more than half their assets in company stock.
Finding the balance: The key to managing risk is to diversify your portfolio. Generally, you should invest no more than 10% to 15% of your 401(k) assets in company stock. If you invest more than that, you're exposing yourself to risk.
When evaluating your asset allocation, revisit your original investment goals, specifically retirement savings goal, time horizon and risk tolerance. Then reconsider your investment options and make moves as necessary.
According to the Employee Benefit Research Institute report, new and recent hires, perhaps feeling less secure in their companies, are opting for balanced funds like lifecycle funds. These mutual funds start out weighted primarily in equities, and then shift to less-risky holdings as participants approach retirement. Depending on your goals, these funds might be a good option for you.
It's also important to understand the restrictions you face when buying and selling company stock. And keep on top of your company's financial health by reading its SEC filings, annual reports and quarterly reports, so you have a better idea of the level of risk in carrying its stock. By diversifying your portfolio and staying informed, you'll be doing your best to protect your retirement nest egg.
http://biz.yahoo.com/ts/090310/10469833.html?.v=1
Showing posts with label own company shares. Show all posts
Showing posts with label own company shares. Show all posts
Monday, 16 March 2009
Tuesday, 2 December 2008
Avoid These Investment 'Bargains'
Avoid These Investment 'Bargains'
When is "such a deal" not such a great buy?
Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.
Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.
A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.
Looking for Securities with a Cheap Share Price
Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group
Hoarding Company Stock--Even When You've Bought It at a Discount
Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.
Buying a Cheap Fund, Then Paying Commissions on Small Purchases
Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.
http://news.morningstar.com/articlenet/article.aspx?id=265385
When is "such a deal" not such a great buy?
Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.
Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.
A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.
Looking for Securities with a Cheap Share Price
Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group
Hoarding Company Stock--Even When You've Bought It at a Discount
Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.
Buying a Cheap Fund, Then Paying Commissions on Small Purchases
Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.
http://news.morningstar.com/articlenet/article.aspx?id=265385
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