An ESPP is a valuable tool if your employer offers one. In a nutshell, you achieve the following:
– Employees of a company can buy their companies stock at a discount price.
– The amount that is deducted from each paycheck is stored in a cash account and builds up until the purchase date.
Offering / Enrollment period
For these types of plans the company offers an enrolement period where you can choose a percent or dollar amount of your income to invest. Companies typically allow up to 15% discount, depending on what the company offers.
Payroll Deduction period
After the enrollment period, you are locked in for the length of the payroll deduction period at the payroll deduction rate that you chose. Common lengths for this are 3, 6 and 12 months. Each pay period the amount is deducted and stored in a cash account. The current balance can be viewed by logging in to your brokerage account.
Note: If you need to opt out of the plan at any time, the total amount of cash that was deducted from your paychecks is returned to you.
The Purchase Date
On the last day of the payroll deduction period, the company stock is purchased at the discounted rate. So if the stock price on that day is $100 a share and the discount in 15%, your shares will be purchased at $85. This is a 17.6% gain on your investment if the shares are sold right away.
Some plans take this a step further with a look back feature.