Markets

Don't Invest Too Much in Your Company’s Stock

By Bob Rall, CFP®

It's exciting to share in the success of the company for which you work. Some allow you to own some of the company’s stock. If the company does well and the stock price goes up, you build wealth along with the company. This can motivate you to do your job well, because you profit when the company does well.

There are several ways that you can invest in your company. A lot offer their employees a discount on the company's stock. They will allow you to have some money deducted from your paycheck to buy shares. They usually offer it at a discounted price that can range from 5% to 15%. Other companies may offer stock as part of a match that they make to your qualified retirement plan. And others make the stock available as a choice in the menu of investment choices in their 401(k) profit and/or profit sharing plans. (For related reading, see: Introduction to Employee Stock Purchase Plans.)

What to Consider

Like most things in life, moderation is key when you decide to invest in your company. Owning too much of your company’s stock can become a real problem. If the company runs into a rough patch, your personal wealth can suffer. In fact, it can be a bigger problem because your paycheck and your investment accounts both depend upon the success of your company. History has many stories of companies that at one time seemed solid and in a short period ran into hard times. A lot of employees in those companies lost their jobs and their retirement because they never would have imagined the hardships that hit their company.

Diversification Is Key

One of the most basic rules of investing is to not put all of your eggs in one basket. We know that we should be diversified. But when it comes to company stock, we sometimes let our emotions replace our logic. We want our company to do well. We think we are helping it be more successful. Whether it’s through an employee stock ownership plan (ESOP), discounted shares or shares we’ve purchased in our retirement plan, we accumulate small pieces of our company over a period of many years. It can often become a much larger part of our overall investment plan without us even realizing it.

If you are confident in the future of your company and you want to take an ownership stake, this can be a sound financial decision. But make sure that your portfolio is also diversified. If 5% to 10% of your overall investment portfolio is invested in your company, that is probably okay. It’s when the stock becomes a bigger piece of your investment pie that you are taking on more risk than you might know.

I’ve seen several situations recently when company stock made up 20%, 30%, 40% and even 80% of someone’s investment portfolio. That’s extremely dangerous, no matter what company it might be. Think about it another way. There are around 4,000 actively-traded public companies in the U.S., and that number doesn’t include private companies that have employee stock available. Of all those companies, which one would you invest nearly all of your money in? Amazon? Apple? Starbucks? Your company? It’s a big risk to put too much of your money in one basket. Would you take that risk with any other company? (For related reading, see: The Best Strategies to Manage Your Stock Options.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.