Employee Stock Purchase Plan

Want a risk free (almost) investment that has (in my case) an annualized return over 100%? No, I'm not talking about Scamway or some other MLM waste of money. I'm talking about Employee Stock Purchase Programs. In general, these employer sponsored plans allow you to purchase your employer's stock at a discount. My company's program has the following features:

• purchase periods every 3 month
• can purchase up to 15% of your gross salary through payroll deductions
• price is based on the closing stock price at the end for the 3 month period minus 15%
• shares get deposited in a brokerage account 2-4 business days after the 3 month period
• can sell stock as soon as it's in your account
• fess are approximately $20 per selling transaction

So your are thinking to yourself: how does a 15% discount turn into over a 100% return? Buy as much as you can and sell as soon as you can. Let's look at an example (I'll be using trivial numbers for easy math):

• annual salary = 40,000
• quarterly purchase periods
• 15% discount
• stock price at end of period = 100
• $20 commission

Step 1 - Calculate your gross return for one period

quarterly salary X 15% purchase limit X ((1/(1-15% discount))-1)

10,000 X 0.15 X 0.17647= $ 264.71

note: that weird transformation we did at the end of the calculation was to convert the discount to a rate of return

Step 2 - Deduct trading expenses to get net quarterly return

$264.71 - 20 = $244.71 net return

Step 3 - Calculate Annualized Return

(quarterly net return X number of purchase periods per year) / average invested dollars

($244.71 X 4) / ??

Step 3a - Calculate Invested Dollars

This is key... you can't simply look at the total investment because most of these programs are funded through regular payroll deductions. Therefore, at the beginning of each period you don't have any money invested and, in this example, you have the full 15% of your quarterly salary invested at the end of the purchase period. Your average invested dollars is really one half of the 15%. So, to calculate our average invested dollars...

(quarterly salary X 15% ) / 2

10,000 X 15% / 2 = 750

Step 3b - Plug & Chug

$244.71 X 4 / 750 = 130.1% annualized return

With the magic of algebra we can create a formula for the TERESPR (The Early Riser Employee Stock Purchase Return)...

d=stock discount

p=number of annual periods

s=annual salary

c=commission

x=percent of your salary you will be contributing

TERESPR= 2p/(1-d) - 2p - 2cp^2/sx

If we plug our prior example...

2*4/.85 - 2*4 - 2*20*4^2/(40000*.15)

8/.85 - 8 - 640/6000

9.41176 - 8 - .106667

1.30501 or 130.5%

A few words of caution:

• Each ESP plan is structured differently so read yours carefully
• The key to this being almost risk free is your ability to sell the stock immediately - if your plan restricts your selling, you have much more downside risk and this may not be for you
• The profit is taxed like regular income... make sure you save some of your profits to pay the tax man
• THIS IS NOT INVESTMENT ADVICE!!!

UPDATE: Political Calculations has built an on-line calculator!