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Why Company Stock May Be Riskier Than Employees Realize


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Stock compensation has its perks, but employees must be realistic (and unemotional) about their investments' prospects. Sometimes strategic sales are smart.

The article from Kiplinger discusses the risks associated with employees holding a significant portion of their wealth in company stock. It highlights that while receiving company stock as part of compensation can be lucrative, it also poses substantial risks due to lack of diversification. Employees often underestimate the risk because they feel a sense of loyalty or optimism about their company's future. However, the article points out that company stock can be riskier than other investments because it ties both their job security and their investment portfolio to the same company's performance. This concentration risk can lead to significant financial loss if the company faces downturns or goes bankrupt, as seen in historical examples like Enron. The piece advises employees to consider selling company stock over time to diversify their investments, thereby reducing the risk of having "all their eggs in one basket." It also mentions the psychological barriers to selling, like the endowment effect, where people value what they own more than its market value, and suggests strategies for managing this risk, including understanding tax implications and setting up a systematic selling plan.

Read the Full Kiplinger Article at:
[ https://www.kiplinger.com/investing/why-company-stock-may-be-riskier-than-employees-realize ]

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