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Investing In Stocks Of Employer

2011 Oct 26

 

Many employees today are encouraged to buy in in employer stocks. Usually they are offered chance to invest and purchase on stocks of employers with the promise of great benefits in the long run. Before you buy in, here’s what you have to know about investing in stocks of employer.

 

The Benefits

There are actually distinct advantages when you invest in employers’ stock; among the many benefits of investing in stocks of employers are as follows:

 

1. Potential of higher returns. You get higher rewards when the price of your employer’s stock increases. You can also purchase discounted shares and receive increased overall amount of stock ownership.

2. More company knowledge. Since you are working with the same company where you invest your money, you have more edge than other investors you are working it. You have more knowledge on how the company works, you monitor its potential growth, and you see its down times. You know when to pull out and when to invest more in your employer stocks.

3. You show some loyalty if you buy stock of the employee company. Even if it won’t be noticed by anyone, it can make you feel better; so you will be more motivated and that may express on yours work results. And finally you are going to be promoted.

 

The Drawbacks

1. Low diversification. Usually if you allocate a large portion of your money in your employer’s stock and your company did not do well in the market, that would also mean great losses on your part. Since there is lack of diversification your portfolio would of course get affected.

2. High risk. If you own a large portion in your company’s stock and the company does well in the market, that means you get bigger returns. But large potion in investing in employer stocks may also pose high risks if the economy contracts and your company’s stocks got affected. If the company experienced serious decline in their stocks, it would also means serious decline in your shares. Unfortunately, if the market came out to be not favorable with your employers stock then it may create impact too in your retirement.

 

There are actually many reasons why you should or should not start investing in your employer’s stocks: either you receive big returns or you gain great losses too. It is always about balancing. You must know how much is too much when it comes to investing. If you know when to balance and when to leverage your shares, then investing in company’s stocks becomes a good investment.

 

You should read about stock valuation including relative valuation. Then you should analyze the company you work at very carefully. If you think that company’s stability is at risk then you should avoid such investment at all, because it would be too risky to lose everything. 

 

However, you think that according to valuation multiples stocks of your employee company is cheap, then it can be a good investment. Before investing in your own company also give a glance in stocks of competitors. Do they better or worse? Which stocks are cheaper?

 

If you think that the target isn’t very attractive investment better to avoid it and look for other choices to invest. 

 

 

Read next article: The Best Investments for Beginners

 

Other articles you may like:

The Best Investments for Beginners

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How to Beat the Stock Market





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