If your employer offers you the chance to buy shares in the company, you might be tempted to go for it. There are generous tax breaks on most such schemes, and it means you can make your hard work pay off twice once via your salary and a second time when you cash in your shares. And if your employer offers you free shares, you should certainly take them up.
However, if you have to chip in yourself, there are at least three things to consider before diving in. Firstly, by building a stake in your employer, you are ignoring one of investing's golden rules diversification.
You already depend on your employer to put a wage in your pocket, and you may even depend on them for a defined benefit pension. So committing yet more cash to a share scheme could leave you over-exposed. No amount of tax breaks can compensate for a sudden share price fall just as you are planning to cash in. A Lehman Brothers-style collapse could put both your investment and your job at risk.
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Secondly, there's the inflexibility an approved share incentive plan will not let you take your money out tax-free unless you have held the shares for five years. If you are offered options instead of shares, for example, you only have the right to buy once these options 'vest'.
This means that although you may qualify for the right to buy shares soon after you join a firm, you may not be able to exercise that right for several years afterwards. That's not great if you are relying on getting the cash out at a certain date.
Lastly, there's the lack of control. If you work hard for an employer, you can expect to be promoted (hopefully) and paid accordingly. In that sense the deal is pretty clear.
But with company shares, you are relying on people to deliver over whom you may have zero control. And don't assume that just because the directors are buying that you should too. Under remuneration rules, they may have no choice!
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