Buying shares in the company you work for is a risky move

It’s a company that many feel tempted to invest in – it seems easy and potentially less risky. But this common investment move is fraught with dangers.

Investing into the company you work for can help you get ahead faster, but with the opportunity comes some trade-offs you need to be aware of and risks to manage.

And, if your company offers an employee share plan, this can accelerate your asset building even faster. But only if you take the right approach.

If you don’t, you can end up being blindsided by tax bills, frustrated by having to sell your shares randomly with no strategy, and stressed about the risk that so much of your investments are linked to one company.

Ultimately, if you don’t make the right investment moves you can miss the opportunity to truly profit from the hard work you’re putting in.

Knowing where to start can be confusing and overwhelming, and the virtual water cooler chat probably isn’t helpful in figuring out whether you should invest into the company you work with. I’m going to outline the key things you need to know here.

Diversification

Diversification means spreading your risk across multiple investments. When you only hold stock in one company, the return on your portfolio is the return on that one company. If the company does well, you do well, and if the company does OK or poorly, so do you.

When you have two or more stocks in your investment portfolio, the lows of one are balanced by the highs of another. The more investments you have in your portfolio, the smoother the return is over time.

Investing in just one company leaves you open to more risk. Picture: iStock

Many people fall into the trap of not wanting to ‘give up’ the potential upside on these investments, but when you can get strong returns by investing in a diversified portfolio, your question should really be: “How much risk do I really need?”

I’ve found that once people understand how the power of diversification can help you build an investment portfolio which delivers strong returns without the rollercoaster ride stress that comes from having most of your investments in shares of just one company, they choose to take some risk off the table.

Another thing you should be aware of is the ‘concentration risk’ that comes when you hold investments with your employer. When you work for a company, your salary, bonus or commission, and future pay increases and potential bonus payments are already tied to the success of the company. When you hold investments and your wealth with the same company, this risk is amplified.

Investing where you work and working where you invest can be risky. Picture: iStock

It’s worth noting that when the company you work for is a good performer, that risk can be reduced – but it is still a risk. When this risk isn’t managed by building investments and assets outside your employer, your money journey can be stressful, investments volatile, and ultimately impact your financial confidence and wellbeing.

When you invest, think outside of what is driving most of your current income and wealth, and you’re going a long way to de-risking your investment strategy.

Involvement bias

I wanted to include a little note here on money psychology, which has a huge impact on how we invest. Unfortunately, our inner investor faces a lot of challenges when it comes to making sensible investment choices, and these thinking flaws and biases can seriously impact your investment results.

Involvement bias plays a big part in how we invest. Picture: Joshua Mayo, Unsplash

One of these biases that has an impact when thinking about investing into shares with your employer is involvement bias. Studies have shown that when we’re involved in an event, we feel that we have a better chance of predicting the outcome.

This means that when you think about investing in the company you work with, you often lose sight of the reality of the investment fundamentals that are really driving the share price performance, and end up making worse investment decisions as a result.

No income

Many of the people we chat with have a goal to build another income source that could replace their income in the future. But because fast-growth companies generally reinvest their profit back into the business, the income (dividends) they pay is often low compared to other investments available to you.

A note on employee share plans

If the company you work for offers an employee share plan, in most cases this gives you the opportunity to access essentially ‘free money’ if you know how to use the rules to your advantage.

I’m not saying in this article that you shouldn’t buy shares with your employer, or participate in an employee share plan – just that it may not be the best idea to hold a significant amount of your investments and wealth in the company you work with.

The wrap

People go to work for a bunch of different reasons. For some it’s to give them purpose, to have an impact on the world, to test themselves, to develop skills and grow as a person, or any number of other reasons.

From a financial perspective, your job should be helping you to grow your wealth and ultimately create financial security. But that’s only if you’re smart about how you use your pay cheque to actually profit from the hard work you’re putting in.

This means you need to be smart about what you do with your money to get ahead. Take the time to understand your investment options and the risks that can come along with investing in the company you work with.

Explore your options, and take the time to weigh up the pros and cons with open eyes. This way you’ll be set to get better results and get ahead faster.

Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben is putting on a series of free money education events in 2022 to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Originally published as Buying shares in the company you work for is a risky move