by Chloe Jones

Created on: June 01, 2007   Last Updated: February 14, 2008

Though there are some good reasons to purchase stock in your employer, there are also some dangers to owning company stock. This is especially true if the company stock makes up a significant portion of your investment portfolio.

Many people begin investing in their company's stock due to the ease of investing. They can sign up in their employer's stock purchase plan and have amounts automatically deducted out of their pay checks and invested into the company's stock. The employee does not have to open a brokerage account, and the stock is usually sold to the employee at a discount from the market price.

Another way that employees accumulate company stock is by exercising stock options offered as a bonus or fringe benefit. This is the way that many Seattle and Silicon Valley millionaires amassed their fortunes.

Employers like for their employees to own stock in their companies. The feeling is that employees will work harder for the company if they own part of it. Though this may be true, owning company stock can be risky for the employees.

The most basic rule of investing is diversification. It is common for an employee to continue to invest in his employer's stock, and not look elsewhere for diversification. Like so many investors, the employee may become complacent about his investments, especially when things are going well. If the stock has a significant increase in market value over the employee's career, the company stock may make up more than half of the employee's net worth. It is not unheard of for people to own no equities outside of their company's stock.

No one should have all of his financial eggs in one basket. A stock can plummet in value at any time. Shares of companies like Enron and WorldCom went from very expensive to worthless practically overnight. This is a problem for any investor, but the employee who has invested his financial future in his company can suffer a double whammy. If a company is struggling, the employee may be laid off at the same time that his company stock is crashing. So the employee will not only lose his regular income, but may also lose his financial cushion, or possibly his life savings. Many people have had to delay their retirement plans after finding themselves in this situation.

It is probably still a good idea for a person to take advantage of his employer's stock purchase plan or exercise his stock options. The employee just needs to keep his investment portfolio well balanced and diversified, not just among different companies and industries, but also among different asset classes, such as stocks, bonds and cash. Just like every investor, the company stockholder should evaluate his portfolio on at least an annual, if not quarterly basis, seeking the help of a financial planner if needed. When the company stock starts taking up too large a share of the total investments, then shares of the company stock should be sold to bring the investment portfolio into balance.

For very large stockholders, there may be rules about how much stock can be sold at one time. Also, some employee purchase plans require employees to hold their stock for a certain amount of time before unloading it. If the stock has appreciated, the employee may have to pay capital gains taxes. For these reasons, it may be wise to consult a financial professional for help with timing these transactions.

Company stock can be an excellent addition to a diversified portfolio. When it takes up too large a share of the investments, company stock can lead to financial ruin. By keeping in mind the dangers of company stock, employees can make wise investment decisions that will lead to a financially secure future.

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