Several companies include company stock as part of their total remuneration package for employees. As a result, employees become owners and may develop a stronger bond with the company.
You may be less likely to arrive early or leave late if you do not own business shares. If you own business stock, you might only pick up the rubbish in the corridor. Instead of going above and beyond, you might only do enough to stay employed!
Why You Should Sell Your Business Shares regularly
Although owning a portion of the firm you work for feels fantastic, you should sell some of your company’s stock whenever possible. Here are the four most important reasons why.
1) The importance of diversification. You’re already precious to your organization.
Most people’s primary source of income is their job. The better your organization performs, the better you will likely achieve, and vice versa. Accumulating firm stock implies a higher concentration risk.
While your firm performs well, you want to own as many shares as possible. Unfortunately, nothing lasts forever. As a small investor, you have little influence over most decisions.
If your stock begins to perform poorly due to poor senior management decisions, you may face a double whammy of a drop in your company’s stock price and job loss. As a result, selling your firm stock to diversify your exposure makes sense.
The more time you spend working for your company, the more company stock you will obtain. As a result, it’s a good idea to sell part or all of your vested shares every year. Even after selling, you will still possess shares because it is uncommon to sell your full position simultaneously.
The average career of companies on the S& P 500 was 33 years in 1965. It had been 20 years by 1990. It is expected to fall to 14 years by 2026. Why is the duration of companies on the S& P 500 so notable? The causes include rivalry, mergers and acquisitions, innovation, and failure.
The share price of your company will inevitably fall. When it happens, you’ll be pleased you diversified.
2) To make money through passive investments.
You should sell firm shares and diversify your money to boost passive income. Your company’s stock needs to pay dividends. For example, most rapidly expanding technology firms do not bring benefits.
As a result, the only way to profit from your company’s share price is to sell. It is wise to reinvest the profits from the sale of your shares in investments that generate passive income. These assets include dividend-paying stocks, REITs, bonds, and private real estate.
If your company does not pay rewards, it is likely a high-beta company largely reliant on future cash flows. Because the future is unpredictable, a company’s reliance on future cash flows raises its risk.
Converting paper money into tangible assets is one of the foundations of earning and keeping wealth. Furthermore, I consider firms that do not pay dividends “fun money.” Its stock price will likely skyrocket one day. It could tumble to the ground tomorrow due to unlimited external and internal circumstances.
The more passive income you can generate through assets, the greater your independence.
3) To obtain items today that will enhance the quality of one’s life.
Any firm stock is an investment for the future. But, we must also live for the now. You may pay for holidays, buy a secure car, buy a great home, take care of your parents, and pay for school tuition by consistently selling firm stock.
There is no use in saving and investing if you never spend the money. Even if the stock price of your firm continues to rise after you sell it, you will still be able to enjoy the activities and items you purchased with the earnings.
4) To cover taxes.
You are taxed on Restricted Stock Units (RSUs) when the shares are delivered, which is nearly always at vesting. Your taxable income is equal to the market value of the shares at the time of vesting.
Compensation from RSUs is taxed at your usual income tax rate. Consider them a cash incentive tied to the price of your company’s shares.
If you keep the shares for a year or more after they vest, any profit (or loss) is taxed as long-term capital gains (shares held less than one year from vesting are taxed at short-term capital gains tax rates).
If the value of your company shares falls before you sell them, you may be in a terrible tax scenario.
Example of Why Selling Some Company Stock Is Critical
Assume you have 1,000 RSUs that vest at $100 per share, and your federal income tax rate is 35%. You must pay $35,000 in marginal federal income taxes on the $100,000 in proceeds.
But, if you choose to hold your shares after vesting and the share price falls to $35, you will lose money. Not only do you still owe $35,000 in marginal federal income taxes, but you also only have $35,000 in stock! In other words, you have nothing because you did not sell your RSUs on the vesting date.
Yes, you have a $65,000 loss that can be used to offset a $65,000 gain that year. Yet, it may take a lot of work to turn a $65,000 profit in such a scenario.
Selling your stock options when they vest is an excellent strategy to reduce your tax liability. Numerous people were burned during the 2000 dotcom bubble and the 2022 bear market by failing to sell their stock after vesting.
RIP, Previous Employer
Be wary of the company to which you wish to devote your life. If you chose the wrong horse, you might have wasted a lot of time, mainly if you did not sell firm stock to fund a better living.
What if my company’s stock price continued to rise?
It’s easy to be relieved that you sold business equity when your company’s share price plummets. But what if your company is gaining a lot of traction? You are confident that your company’s stock price will continue to climb over time. Should you continue to sell your shares every year?
No matter how enthusiastic you are about your company, unknown external variables occur regularly and might result in substantial setbacks. Recent variables include the pandemic, lockdowns, changes in government law involving evictions and student loans, bank runs, wars, and an overly active Fed.
Corporations such as Meta surrendered five years of stock gains in 2022. Silicon Valley Bank lost forty years of stock gains when it entered federal receivership in 2023. Stock prices can quickly recover.
Being an early employee at companies such as Apple and Google may be helpful. You would be extremely wealthy if you had never sold shares for at least ten years. Nonetheless, the chances of joining a superstar company early and sticking for more than ten years are slim.
New Difficulties Ahead
With the development of artificial intelligence and short-form video services such as TikTok, sharks are now circling. As a result, it may be advisable to sell some of my company’s stock and diversify my holdings.
The variable component of your overall salary is company stock. Manage the risk asset like any other asset and perform the necessary due diligence.
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