An Employee Share Purchase Plan (ESPP) is a company-run program that allows employees to purchase company stock (shares), usually at a discounted price.
Here are some key features of an ESPP:
- Discounted Purchase Price: Employees can typically buy shares at a discount, lower than the market price.
- Payroll Deductions: Employees may contribute to the ESPP through automatic deductions from their paycheck. This money is then used to purchase company stock.
- Tax Implications: Generally, the discount on the stock purchase is not taxed until the employee sells the shares, and even then, the gain can be treated as a long-term capital gain, which is taxed at a lower rate than income.
- Holding Period: Some ESPPs have a holding period requirement (lock-up), meaning participants must hold the purchased shares for a specified duration before selling them. This encourages long-term ownership.
- Risk and Reward: ESPPs can be an attractive way for employees to invest in their company at a discount, potentially increasing their financial stake and benefiting from the company's growth. However, like all investments, there is a risk, especially if the company's stock price decreases.
Overall, an ESPP is a valuable tool for employees to build wealth and participate in their company's success.