Investing in Company Stock – How Many Shares Should You Own?

Buying company stock is often touted as one of the benefits of working for a profitable corporation that lets employees own shares of the company.  While it can be a benefit when profits are increasing, it can also have a negative effect on your investment portfolio and financial situation when times aren’t so good.

Owning Company Stock

When determining whether or how much to invest in your company’s stock, an important question is how much of your company’s shares you actually own inside:

• Your personal mutual fund choices in taxable and non-taxable accounts.
• Your company’s own 401(k) plan, which might match your contributions with company stock.
• Company-stock vehicles like employee stock purchase plans, employee stock ownership plans (ESOPs) and stock option plans that allow you to buy the company’s shares as you vest.

How Much Company Stock to Own?

How much company stock should you own compared to the rest of your investment portfolio? There are some experts who say you should limit exposure to your employer’s stock at 30 percent. Others will draw the line at 10 percent. 

In part, the answer may depend upon the degree to which other parts of your financial picture are tied to the success of the company.  Most experts will also say that if you have less than five years to retirement, you should make sure your portfolio is properly balanced so a sudden downturn in the company doesn’t sidetrack your plans. 

Here are some other ideas to explore in making sure your portfolio doesn’t sink you:

Keep educated about all your investments: Time is a factor for everyone, but it’s particularly important to keep reading and listening to the news about any kind of investment that’s dominant in your portfolio. At the same time, you might learn about investments that could be added to improve your performance.

Talk to your tax professional: If your company shares are in a retirement plan or IRA, selling shares won’t trigger any current taxes, but if you’re planning to sell shares you own outright that you purchased for a fraction of their current value, talk strategy with your tax professional first.  Depending on your personal circumstances, there may be ways to limit your exposure to a significant capital gains tax hit.

Rebalance your portfolio: If you find you have no choice but to keep your total holdings in your company’s stock, take a look at all of your outside investments to make sure they are properly balanced against a potential loss in those company shares. However, if these other investments are in taxable accounts, absolutely make sure you’re not taking a significant tax impact as a cost of balancing that portfolio.

This post on investing in your company’s stock is produced in association with the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

• No Load Mutual Fund vs Load Mutual Fund
• Are Your Friend’s Investments Performing Better Than Yours?
• Actively Managed Exchange Traded Funds
• Is the Stock Market Down?
• Index Fund Investing Overview