What risks are there when investing in your employer?
Should you invest in your employer? They’re already paying your salary in return for your hard work and time. Why would you invest in your employer with your own money that they just paid you? What are the advantages or disadvantages of investing in your employer?
Whoa, let’s slow this down for a minute and maybe start somewhere else…
How can you start investing in your employer?
There are a few different ways you can get started investing in your employer. Below I’ll discuss a few options I’m familiar with and how they work:
- Some companies are called employee owned companies. This means they offer the chance for their employees to purchase shares at defined periods throughout their employment, usually yearly. As far as I know these shares don’t come usually with voting rights where you can vote on the Board of Directors similar to publicly traded shares on the TSX or NYSE.However they do entitle the owner to a very large portion of the profits. This is the biggest reason people buy into their own companies in this format, it ends up being treated as a yearly “bonus” for them. These companies usually pay out much higher than a 3-4% dividend that you would find on some higher paying dividend companies on the stock markets.
- Another popular way to invest in your employer is through publicly traded shares. These would be actively listed on a stock exchange like the TSX or NYSE. There is no difference in investing this way than investing in any other publicly traded company. You would buy shares normally like you would through your bank or an online brokerage such as Questtrade or Etrade.
Is it worth investing in your employer?
If the shares go up, of course it’s worth it, if they go down it isn’t. It’s all a matter of your own risk tolerance and current status of your portfolio. If your employer is Berkshire Hathaway then chances are it’s an excellent investment as Berkshire is a holding company that owns multiple other companies. It actually owns hundreds of companies that are not not working in tandem with each other to produce an end product, other than to make a profit for the owners. Unfortunately most of us do not have employers like this.
A good reason for investing in your employer is if they fill a hole in your investment portfolio. For example if you’re employed by a company involved in real estate and your investments are all in utilities, oil and gas, banks, and just about everything but real estate, no real estate investment trusts (REITs) no income properties(link to article) or anything of the sort. In this situation investing in your employer may not be a bad idea, but it’s still not without extra risks.
The biggest risk in the above mentioned situation would be because your salary is already coming from them, which like most of us is the VAST majority of our income. If the company hits a rough patch you may lose your job or need to take a pay cut. The company’s share price could also tumble, losing equity if you’re forced to sell. Simply put, owning shares in your employer could trigger a domino effect if something were to happen in their market place.
Have you ever invested in your employer?
As a matter of fact I have! I actually bought shares of my employer 4 years before I was employed full time with them. I took a work term in 2007 with them and that was about the time I started looking into the stock market and trying to learn. Since they were a publicly traded company and I knew nothing about investing it seemed like a great idea to dive in and buy a few hundred shares.
Over the past several years I was trying to “play” the stock. In 2008 during the crash I sold and bought in again at a cheaper price. This continued until around 12 dollars, then I’d sell and buy back in around $10/share. Eventually when I was a full time employee, the stock plummeted again, it had nothing to do with the markets this time, it was the company’s finances and leadership. We had a ton of debt from acquiring companies and trying to expand into other sectors of construction.
Eventually the board of directors got sick of the CEO and replaced him, the new CEO managed to correct our poor financial habits before we dipped below $2.50/share and I bought as much as I could afford at the time. After a year this was worth nearly $8/share, being the greedy guy I am, I held on to it for another year long tumble down to around $3.50/share where it currently sits.
Where it currently sits, it makes up about 5% of my current net worth. Which since I’m not the most diverse investor at the moment it poses enough risk that I wonder if I should sell now or wait until it climbs up a little. Most investment analysts have our target price at $5/share or higher, so the outlook is reasonable.
The biggest risk right now for me is the fact my annual income is about 85% from my employer. My employer is a construction company with the majority of our clients being oil and gas companies, this causes our share price to follow the price of oil much closer than shareholders would prefer. With the price of oil being low, our clients aren’t developing new projects. With not many new projects being awarded; my company has begun laying people off.
To add to the risk of my income being associated with oil prices, I bought my first home in Fort McMurray, which is a town that services the oil sands. This means a large portion of my net worth is also tied closely to the price of oil. If things don’t turn around over the next year my situation could end up very bad with the worse case scenario resulting in a loss of 85% of my annual income along with 5% of my net worth.
So was it worth it for you?
To be honest, I don’t know. What I do know is I will not be increasing my investment in my employer in the future, nor will I reinvest to try to “play” their stock price if I claim any profits anytime soon. After all of this I will say I do not regret buying into the company but I am nervous about how the next few months will play out. I am still young at 30 years old so I will have time to recoup a 5% loss in my net worth if everything does go south so I’m willing to wait it out in hopes of seeing that $8/share price again.
If you have the chance to invest in a future employer would you?
Even with the high risk position I’ve put myself in, I think I would but I would be much more careful on the type of investment I’d make. This will hopefully be many years down the road and at that time it will depend upon where I am in life with my financial goals and family. If the employer is an up and coming business that I could own a much larger stake in, maybe I will invest. If the company is already established on a stock exchange, then probably not; I feel like I would not be able to have enough influence to make my investment work effectively unless I was on an executive level.
So should I invest in my employer?
Sorry but I can’t make that judgement for you. It entirely depends on your level of risk tolerance and how diverse your portfolio currently is. If you’re unsure if your employer fits well in your investment portfolio then I’d suggest talking to a flat rate investment advisor, someone who isn’t going to make money off of your decision. I would be very cautious about taking any advice about investing in your employer from it’s employees.