| Help! Borrow to Invest in Stock Options of own Company??? |
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MoneyN00b
New Poster
Cash: $ 0.45
Posts: 2
Joined: 10 Feb 2010
Location: Toronto, Canada
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| Help! Borrow to Invest in Stock Options of own Company??? |
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Hello everyone,
As my name suggests I am completely new to investing and this forum. I just finished school and am starting a new job soon, while my wife has only been working for a few years. As a result we already have LOTS of student loan debt, but our jobs pay highly so we are confident we can get out eventually.
My question is about a new opportunity that I don't know much about. My wife is a well-paid engineer at a good company in Ontario. The company has been expanding through acquisitions for years, and is likely going to continue to expand, even though a rough economy. Now that my wife has worked there a few years, they are offering her shares in the company. It is not a publicly traded company, but rather the employees own all the shares. Now that she is now able to buy shares, all her fellow employees and bosses are encouraging her to buy as many shares as possible because the company is doing so well that the profits from the shares are apparently extremely high. They even suggest getting a large personal loan and using that to buy shares... But I'm weary about borrowing to invest.
Does anyone know anything about this type of situation? Is it a common way for companies to be owned? Does this type of investment have a particular name? Does anyone have experience with something like this? Are there any internet links that provide more info on this type of thing?
Thanks a lot I really appreciate all your help!
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MoneyN00b
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Wed Feb 10, 2010 3:50 pm |
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MoneyN00b
New Poster
Cash: $ 0.45
Posts: 2
Joined: 10 Feb 2010
Location: Toronto, Canada
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| Re: Help! Borrow to Invest in Stock Options of own Company?? |
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Nobody? Is everyone stumped? Really?
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MoneyN00b
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Fri Feb 12, 2010 5:18 pm |
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oldguy
Senior Member
Cash: $ 274.90
Posts: 1312
Joined: 21 May 2006
Location: arizona
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| Re: Help! Borrow to Invest in Stock Options of own Company?? |
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quote:
Originally posted by MoneyN00b
Nobody? Is everyone stumped? Really?
I had to go to 'Quote' to get thru to you, your post is blocked for 'Reply" - don't know why. But that is why there are no replies.
quote:
Now that she is now able to buy shares, all her fellow employees and bosses are encouraging her to buy as many shares as possible because the company is doing so well that the profits from the shares are apparently extremely high. They even suggest getting a large personal loan and using that to buy shares... But I'm weary about borrowing to invest.
It is not extremely common but there are 100's of medium sized companies that are employee owned. Grocery store chains often do that, they may have up to 100,000 employees but 2000 is more typical. So the 'employee owned' vs 'public' part of the question is not a factor.
More importantly, a common investment error is to put too much money into the company that you work for - you are already dependant on them for salary, so it is poor diversification to place your family wealth there too. So, the general advice is, if you insist on investing in the company that you work for, make certain that it is <5% of your investments.
Equally important - a total stock market index gets about an 11%/yr average long term return, it is diversified among 7000 companies, big, medium, small, global, so it is very general. A business sector index is specialized to a business so it carries the added risk of a sector downturn, yet they also get an 11%/yr return. Next is the individual company, more specialized than a sector and carries the added risk of a company failure or even a bk, yet they too average 11%/yr. The point is - they all get 11% but the risk level varies from 15% to 28% (standard deviation) - stated simply, an individual company has twice the risk of an index but the return is about the same. That is called uncompensated risk, the worst kind - you want risk but you want to be compensated for it.
As for investing with borrowed money - yes, I do it often. But be very certain of your money supply, take your risk on the investment, not on your supply of capital, they could both go in opposite directions and get beyond your control. I have rental houses, whenever I can get <6% money for a 30 yr term I refinance a house. But I always get fixed rate loans that are fully amortized, I do not use variable rate loans and no balloon payments, you don't want to be forced into a bad management decision by the calendar (a balloon or a rate hike). Folks often say "I'll just refi in 6 yrs when it comes due" - but not so easy if rates happen to be 15% then.
Eg, say that I refi a rental and add $50k to my loan - that costs $300/m, about $108,000. I put the $50k into a 12%/yr index fund for 30 yrs and it grows to $1,500,000. The power of compounding is surprising, ask your wife. 1.12^30 = a factor of 30. I've done this on our rental houses for 35 yrs, one house has been refi'd 4 times since 1980.
But, no, I would not borrow to buy stock in her company - in fact I would stay well below 5% (and the purpose is to be a team player, a good company supporter). If you happen to make a bit of money, that's OK too.
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Sat Feb 13, 2010 2:05 am |
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coaster
Senior Advisor
Cash: $ 1318.80
Posts: 6496
Joined: 11 Oct 2005
Location: Wisconsin
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| Re: Help! Borrow to Invest in Stock Options of own Company?? |
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quote:
Originally posted by oldguy
I had to go to 'Quote' to get thru to you, your post is blocked for 'Reply" - don't know why. But that is why there are no replies.
As far as I know the member isn't blocked from posting. There's no reply button on my browser either. I examined the source code and the reply button code is, oddly, commented out, which is a manual edit type of thing, and can't be done for individual threads. Well, maybe with a database modification, but I don't know of any to do that.
Andrew has been having some problems with advertising links and he's been doing some work on the forum. I don't know for sure but my guess it's an inadvertant editing mistake. The only way to block replies on a thread is by closing a thread and there's no way to block replies TO an individual member.
Back to topic: I'd be wary of borrowing money to buy these shares as well. Too many people have lost too much by having all their eggs in one basket. If they lose those eggs AND the money to buy the eggs was borrowed, then they're out twice over.
~Tim~
Eye Candy : Why Whimsy
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Sat Feb 13, 2010 7:49 am |
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Sime
Senior Member
Cash: $ 74.85
Posts: 387
Joined: 19 Mar 2009
Location: United Kingdom
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| Re: Help! Borrow to Invest in Stock Options of own Company?? |
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quote:
Originally posted by coaster
There's no reply button on my browser either. I examined the source code and the reply button code is, oddly, commented out, which is a manual edit type of thing, and can't be done for individual threads. Well, maybe with a database modification, but I don't know of any to do that.
Noted. I've asked Andrew to look into this.
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Sat Feb 13, 2010 3:26 pm |
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