One of the most popular questions I receive on my personal finance blog is from people asking if it’s a good idea to buy stock in the company they work for.
They’re not asking about stock options or employee stock purchase plans (which I’ve covered elsewhere), they’re specifically asking about whether or not it makes sense to pay market price for company shares through a regular brokerage account.
They feel they have an advantage over other investors because they know the ins and outs of the company and have a better overall picture of the company’s wellbeing.
I’d argue that an employee of a company does have a better chance (on average) of knowing when to buy or sell the company’s stock, but there are also MANY reasons why I don’t recommend this practice to my readers.
Too Much Risk:
The biggest reason I don’t recommend purchasing ordinary shares of the company you work for is you’re putting too many eggs in one basket. If something unexpected happens within your company you could lose your job and lose your investment. It’s better to diversify your income away from your investments unless, of course, you’re a small business owner and/or a majority shareholder.
Too Much Anxiety:
Another reason why I discourage people from buying shares of their company’s stock is it can increase levels of anxiety and uncertainty. Most people already have some level of anxiety over the security of their employment. Tying up a large percentage of your investment portfolio in your employer will do nothing but add to this anxiety.
Conflict of Interest:
It’s one thing to have a good working knowledge of your company’s financial strength and business interests. It’s another to have “insider” information and buying (or selling) your company’s stock on this information. No matter how ethical you may think you are, it can be too tempting to have a large percentage of your investment portfolio sitting in your company’s stock when you know your company’s stock is going to tank in a few days from a press release that hasn’t been made public yet.
Rules of Thumb for Buying Stock in the Company You Work For:
- Never invest more than 10% of your overall investment portfolio in your employer’s company stock exclusive of any stock options you may have accrued.
- If you find yourself worrying excessively about your company’s share price, reduce the number of shares you own (or sell them entirely).
- Consider investing in mutual funds with a solid track record over a long period.