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Your paycheck may not come completely in cash. Many firms offer the ability to use shares from the company to increase your net worth. Stock purchase plans are one of these options. The plan’s goal is similar to stock options, which allows participants to purchase shares at a discount, but the function is different. While stock options allow users to purchase shares at a static share price called the strike price, stock purchase plans allow buyers to purchase shares at a discounted percentage of the market price itself.

The actual percentage will be specified in the stock purchase plan. This ranges from high single digits to low double digit percentages. When you use your purchase plan options you will purchase the shares at that discount from the current market value.

Concerns: Diversification

Your existing investments should be considered before using the options. If you hold a large percentage of company stock in your portfolio (anywhere in the double digits) you should think carefully before acquiring more.  Your investment within the firm will be over-concentrated. If the firm tailspins, you’re overly exposed to financial loss. This also applies to your employer’s industry. Industry-centric economic shocks do occur. Holding a lot of investments in the same industry as your employer can result in a financial wipeout, even if you’re well diversified in the sector.

If you own large amounts of shares in the industry or company, there are other strategic solutions. Consider selling your current shares at the market price, and using your purchase plan to replace them at a discount, keeping the difference as profit. Stay aware of capital gains taxes and commission fees. They will reduce your gains. They might even cancel out profit or force losses.

Concerns: Personal Finances

Your personal financial situation also applies. If you have debts, financial concerns or problems, they should be resolved before you purchase shares via options. The last thing you can afford is purchasing the shares with money you barely have, especially if the company eventually fails financially. Many investment illiterate workers purchase shares in their companies, only to watch their shares tailspin. They lose net worth, while still having debts and other financial issues.

Concerns: Valuation

If you’re a valuation focused investor, you’ll want to calculate the intrinsic value of the shares with your preferred discount rate. If the purchase plan’s discounted price is equal or below the discounted intrinsic value, you’ll consider picking up the shares. If you’re purchasing to sell shares, keep in mind that you will have to wait to unwind the position. If you buy and sell shares within a calendar year, your sale gets calculated as cash income and not capital gains. This changes your tax rate from the current capital gains tax to your income tax bracket rate. Income tax rates are almost always higher than capital gains tax rates.

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