Is my employee stock purchase plan a risk free investment?
My company offers an employee stock purchase plan with two 6 month periods. At the end of the period I buy the company stock at a 15% discount on the lower of the price at the start of the period and the price at the end of the period. There is a maximum on how much I can contribute per year.
I am Canadian and live in Canada, but the company is American so I contribute in USD. I sell as soon as possible after each period ends.
Is this a risk free investment? Am I guaranteed a 15% (before taxes) or more return?
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It's a risk free investment only if you have 100% warranty that you will be able to sell these stocks for a better price than what you've paid. And that's virtually impossible.
I don't think there is any "risk free investment" when stocks are involved.
You can try to minimize the risks and consider them low, but IMO it's dangerous.
There would be small generic risk that the company stock goes down real fast by more than 15% in a specific event to the company [fraud, segment company operates suffers a shock, etc] or a generic event to the stock market like recent events of Greece etc.
Your maximum risk is 100%.
If you buy the stock 15% off and your company goes bankrupt tomorrow, you've lost everything.
It also sounds like you have foreign exchange risk.
One can debate how much risk this is in terms of expected outcomes, but that was not your question.
However, if you purchase the company stock and buy put options at the same time, you can lock in a sale price ahead of time and absolutely limit your risk. Depending on the amount of stock we're talking about, you can buy currency futures as well to hedge the exchange risk. You don't necessarily have to buy the break-even strikes, you can buy the ones that guarantee a positive return. These are probably fairly cheap.
Note that a lot of companies have policies that prohibit beneficiaries from shorting the company stocks, in which case you might not be able to hedge yourself with put options.
I don't know what restrictions are put on the average employee at your company.
In my case, we were told we were not permitted to either short the stock, or to trade in it options.
That said, I was successful shorting the exact number of shares I'd be buying at the 6 month close, the same day the purchase price would be set. I then requested transfer of the stock purchase to my broker where the long and short netted to zero.
The return isn't 15%, it's 100/85 or 17.6% for an average 3 months they have your money. So do the math on APR. (Higher if the stock has risen over 6 months and you get the lower price from 6 months prior.)
My method was riskless, as far as I am concerned. I did this a dozen times. The stock itself was +/- 4% by the time the shares hit, so in the end it was an effort, mostly to sleep better. I agree with posts suggesting the non-zero risk of a 20% 4 day drop.
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