IFB69: Listener Q&A: ESPP and Ally Brokerage

Welcome to investing for beginners podcast this is episode 69, tonight Andrew and I are going to take a few minutes we’re going to answer some listener questions. We got some great questions over the last couple weeks, and we wanted to take a few moments to read through those and answer those on the air, so without any further ado I’m going to turn it over to my friend Andrew, and he’s going to go ahead and start us off.
Andrew: yep cool so let’s get going got an email it says.
Hi, Andrew and Dave thank you so much for your podcast which is very helpful to me as a beginner I also enjoyed Andrews free ebook I feel like both of you guys have a lot of useful insight for people trying to get into the market as beginners.
My question is a bit specific and then is about employees stock purchase plans ESPP particularly the one that my employer. I’m not going to say which employer he has. But let’s see he says the cool thing about the ESPP is that in addition to being a no-cost except for on sales which I wouldn’t plan on regularly doing Drip plan I get a 15% discount on the market price of the stock at the time of the buy for every buy.
Also get the discount when shares are purchased with automatically reinvested dividends then when I stop then when I sell the stock I get the full market price at the time of the sell for taxes. The capital gain would be the same would be the sale price plus the disc – the discounted price not the market rate at the time of the buy.
I still get taxed on the bonus 15%, and he says while this sounds like a great deal I have been hesitant to participate. The main reason is simply that I am unsure as to whether the stock is a good investment, so and then he asks he talks about the particular stock in some of the characteristics in there.
He also says the other obvious reason is that it will limit my ability to diversify properly since I have a pretty limited amount of extra cash for long-term investment. I do participate in my employers 401k as well which is also great matches 50 percent up to eight percent though doesn’t offer much flexibility regarding which funds to choose from. I also have a small amount and other dividend stocks and ETFs that’s all meant for the long term.
He talks about the stock how he’s worried about the price crashing he says now I’m not worried about the stock price crashing he’s just wondering if there are better stocks out there including the discount. Wondering what my thoughts were on this should I start investing a small amount in the ESPP see how that goes or do you think definitely stay away with the debt-to-equity so high thanks so much.
Jay from Boston
This is a really great question and I know for two of the companies I’ve worked for they offer ESPP it’s going to be different depending on your company, and the terms are going to be different so obviously it’s very important to understand what those terms are first for those of you who don’t know what ESPP is generally from what I’ve heard and seen and obviously in this question as well is they’ll give you as an employee you will get an option to buy stock in the company.
What you tend to see they will incentivize you to buy stock in the company by giving you some sort of discount on it, so I’ve heard of 15% that’s what I’ve seen Jay talked about 15% here.
What that means is they take your money out of your paycheck just like a 401k and then they will buy shares for you at the certain purchase date and then so let’s say if the company that you’re working at their stock is trading that like ten dollars you would get 15% off of that. so essentially I apologize because I am not thinking of the math so 15% a dollar 50 so you’d be able to buy the stock at 850 even though the stocks trading that 10...