If you work at a public company, chances are that your company offers you a way to buy stock in your company at a discount. It’s a way of saving and investing automatically where your investment gets deducted from your paycheck. There is no tax deduction – you are using after tax money to buy your company stock. The discount can range from 5-15%. Most plans allow their employees to save between 1-10% of their pay (or a specific dollar amount) which is withheld to buy stock during an offering period.

Although most companies discourage buying the stock and then immediately selling it (flipping), this usually is still an option for you. Some companies require you to hold the stock for specific length of time, and will cap the amount of purchases to $25,000 per year.

If you buy shares at a discount, you most likely do not have to report any income. When you sell, and if you have a gain, your gain will be taxed. Consult your tax advisor for more details.

ESPPs can be a great way to achieve some wealth. Most employees jump at the opportunity of buying their company stock at a discount. But there are definitely things to think about.

First, because these purchases happen automatically, the dollar amount of your position can creep up on you. Even though you are buying shares at a discount, there is still the chance that you can lose money. Your stock can go down by more than your purchase price. You are buying an individual stock. There is no diversification. This is not a mutual fund. Limit your purchases to 20% of your investable assets.

Second, some people think that they can fund a specific goal with the performance of just their company stock. Assign more than one of your assets to a specific goal. Use cash, mutual funds, and bonds as well.

Third, I can’t tell you how many times I have heard people participating in their ESPP, and not selling, because everyone else at the company, including senior level management, did not sell. Take care of yourself and sell when you need the money for your goal. If you are going to need the money within 5 years, you may be better off just not participating in your ESPP.

Fourth, keep in mind that one if the biggest factors that will determine the stock’s performance are the earnings of the company. But what if your pay (or bonus) is tied to your company’s success? Think about last year. Many people’s bonuses were eliminated or drastically reduced – and their company stock did not perform well. It was a double hit to their financial situation.

Author's Bio: 

Justin Krane, a CERTIFIED FINANCIAL PLANNERTM professional, is the founder of Krane Financial Solutions. Known for his simple, savvy, holistic approach to financial planning, he has the unique ability to advise his clients on how to merge their money with their lives, so that they can make sound decisions with their finances, and get more of what they want in their lives. Using a unique system developed from his studies of financial psychology, Justin partners with you to identify and clarify your goals, and advises you on what you need to do to reach them.

He holds a Bachelor of Arts degree in Finance from University of Colorado, Boulder, graduating in 1994. Prior to founding Krane Financial Solutions, Justin was a Vice President, Investments, and Sales Manager at UBS Financial Services Inc., for 12 years, in Beverly Hills, California. Justin has earned the designation of Certified Investment Management Analyst from the Executive Education Department at the Wharton School of Business. He is also a Member of the Financial Planning Association, the largest organization of professionals dedicated to championing the financial planning process.

He has two children and lives with his family in Calabasas, California. Justin is an accomplished athlete and was a former junior ranked tennis player in Los Angeles. He loves to cook, travel, speak Italian, and spend time with his family. Justin is also an active member in the Cystic Fibrosis Foundation.