Selling your company stock regularly is generally a smart move, especially if you receive shares as part of your compensation. It’s a common practice for companies to issue stock to employees, turning them into partial owners, which might boost their commitment to the company’s success. However, there are substantial reasons to consider selling those shares periodically.
Why It’s Smart to Sell Company Stock
1. Diversification: Your job already ties your financial well-being closely to the company’s fortunes. By holding too much company stock, you’re doubling down on that risk. If the company hits hard times, not only is your job on the line, but your investments could plummet too. Regularly selling shares helps you spread risk across a broader range of assets.
2. Generate Passive Income: Company stocks may not always pay dividends, which means they’re not providing you with regular income. By selling some of your shares, you can invest in assets like dividend-paying stocks, bonds, or real estate investment trusts (REITs), which can provide you with a steady income stream.
3. Liquidity for Personal Use: Stock investments represent future wealth, but they don’t help with present needs. Selling shares can free up funds for immediate expenses—anything from home purchases to vacations, or even funding education. Enjoying the fruits of your investments is as important as making the investments themselves.
4. Managing Tax Liabilities: Especially with Restricted Stock Units (RSUs), tax is due at vesting time based on the value of the shares. If the stock value falls subsequently, you could end up paying more tax than the current value of the shares, leading to a financial loss. Selling shares as they vest can prevent this mismatch and manage your tax liability effectively.
Practical Example and Personal Experience
For instance, imagine your 1,000 RSUs vest at $100 each, placing you in a 35% tax bracket. You owe $35,000 in taxes immediately. If the stock price drops to $35 later, the stock’s total value would only cover the tax you owe, wiping out your potential gains. This shows the financial impact of not selling immediately after vesting.
From my own experience, I consistently sold my vested shares while working at Credit Suisse from 2001 to 2012. Post-dot-com bubble and during various market fluctuations, I focused on converting my shares into more tangible assets like real estate. Watching Credit Suisse’s decline over the years only validated my strategy of regular selling and diversification.
Conclusion
Ultimately, while holding some company stock can align your interests with the company’s success and benefit from its growth, it is wise to avoid having too much of your net worth tied up in any single investment, including employer-issued stock. Regularly assessing your investment in relation to your overall financial picture and making adjustments as needed can help secure your financial well-being, regardless of how well your employer performs.
