Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 18, 1994 TAG: 9408100002
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Regardless of the source of the stock, is it a good policy to sink your personal savings in the company on which you depend for your paycheck?
As usual with questions involving finance, the answer is "it depends."
"You should look at it with the same eye as any other purchase," advised John C. Parrott II, a certified financial planner with Wheat First Singer Butcher in Roanoke.
When you work for a company, he pointed out, you have an insider's view of its direction, leadership, financial results and momentum. Are you confident of the employer's course in its market?
Many people bet with the company. And in his experience, Parrott said, "Some of the best payoffs at retirement are people who put money in the company."
Options to purchase stock at a set price on a future date, he said, generally are granted at a very generous price, he said. If this is the case, "You can see very good profits out of them."
As a general rule, Parrott said, stock options are awarded as an incentive to improve the company's profitability and, therefore, its stock price. People get them with a price set at such a level that it is possible to buy cheaply and sell later at the market price.
Parrott has seen people exercise their options at the low price and sell simultaneously, with a portion of the money from the sale used to pay the cost of the purchase. That means you don't need money to buy the stock the company is offering at an incentive price.
All the same, Parrott warned, "You have to examine the fundamentals of the situation."
That means you must ask whether the company stock is a good buy. It's an opportunity to participate in your company's growth - provided that, in your best opinion, your company and its industry are going to grow.
A.J. Stuart, a fee-only financial planner with the Lynchburg firm of Barringer, Huff & Stuart, said most people buy company stock as part of a tax-advantaged plan. Purchase of stock on that basis is usually a good move, he said, primarily because of the deferral of taxes.
The caveat, he said, is the quality of the company stock. This is important, he said, so people must put aside their feelings and prejudices about their employers. Stuart suggested using outside rating services for an evaluation of the company.
He had another warning as well: "You don't want to put a disproportionate amount of your future financial stability in the hands of one company."
Stock in your own company, he said, can be part of your scheme in a diversified portfolio. Spreading your risk is prudent.
Stuart said he would be uncomfortable with any investment plan that involved the stock of only one company. "I don't care what the company is."
He recalled that there was a day when IBM Corp. was considered invincible in its market, and its stock sold at well above $100 a share. Today, he pointed out, the company's stock sells in the mid-$50 range after falling to a low of $40.625.
IBM has a lot of employees, Stuart said, and "I bet a lot of those employees are overloaded on IBM stock." They have about half as much for their retirement as they had planned, he pointed out.
Options, on the other hand, are "usually very favorable. It's a very favorable deal."
If the price set for the purchase is set low enough, he said, "it might be hard to lose money" on the transaction.
If the employer offers stock options, he said, look at the situation objectively. Examine the stock and determine if the cost of the purchase is sufficiently low to justify exercising the options.
by CNB