Risk-Reward of Your Company Stock
We make decisions in everyday life based on seeking a reward given the risk we are willing to take. Without risk, there is no reward.
Let’s break this down.
What is the reward?
The reward is higher returns when your stock price rises. Something happens at your company or in your industry that creates value that didn’t exist before. The market recognizes this and the stock price rises.
The public has access to available information and the way the company is performing, and they have determined to drive the stock price on a certain path. That’s how the market works. Something better must happen in the future for the stock price to go up, especially for it to go up more than other companies. And if that happens, that’s the reward: our stock price goes up.
Assuming the stock price goes up, would you sell?
Put yourself in this position:
- Things are going even better than they are today.
- The stock price has gone up.
- The news is good.
At what point do you think that you should sell?
If you don’t have a plan, it is unlikely that you will sell after the stock goes up. Why not let it continue to go up?
Unfortunately, we’ve tricked ourselves to believe that just because the price went up in the past it will go up in the future. We know this can’t always be the case.
Therefore, it’s important to have a plan to make sure you are consistently diversifying from your Company Stock.
What is the risk?
You have your income coming from your employer, the same company who is giving you this stock, which is part of your wealth. So, both your wealth and your income are tied to the same company. The value of the stock is determined by how the overall company is doing itself, but they are still very much tied together.
If something goes bad, how bad will it get for you?
In other words, if the company stumbles enough to affect your employment (as well as the stock price), how will it affect you? I think this is important to understand as we take the risk of holding Company Stock.
Weighing risk vs reward
If we think about another market, casino gambling, we know that the probability of winning each individual bet is less than 50%. That’s why gambling doesn’t work in the long run.
In the stock market, we expect more than a 50% chance of winning, but we know there is a real possibility of our stocks to go down. To be successful, we need a lot of shots on goal, and we need a lot of opportunities. When we think about having our own company stock, that is just ONE opportunity in the marketplace.
Sometimes we have some wealth that we can gamble with. However, if your company stock is a significant portion of your wealth and you need it for future expenses, then I would suggest that you do not gamble with it.
So, my question to you is, do you want to play this game?