When is the right time to sell stock? When it is at it’s maximum value and just before it decreases or when it’s growth is going to lag the market are the obvious answers. However without the use of a time machine then picking the right time to sell will always be a challenge. So what should you do if you have stock from company share plans that has vested and is now yours to hold or sell?
Working in compensation & benefits for so long has given me the opportunity to observe employee behavior with regards selling stock. I remember working for a company many years ago where on the date that employee stock vested there would be a flurry of inquiries from the traders regarding selling their stock. The company was doing well, sentiment was good and the share price was rising, I was perplexed as to why these very intelligent employees were rushing to liquidate their newly vested stock.
My first assumption was that they knew something that I didn’t and the company was in some trouble, that did not turn out to be the case however. What they were doing was hedging and diversifying. One of the senior traders explained to me that if the company did well his salary would go up, his bonus would be good and his long-term incentive grants would be big. If the company did badly, the opposite would happen and he would have very low salary growth and bonuses.
He therefore needed to reduce the risk and extreme exposure to his own company’s performance whenever he could, that is why he would sell his stock soon after vesting and use the money to invest elsewhere. Everyone has heard about diversification and limiting exposure to your major holding is all that you are doing by selling stock and reallocating the cash soon after awards have vested from your company share plans.
Diversifying and managing risk is one way to look at it – another angle to view this question from is regarding generating optimal returns from your assets. Very few employees get a cash bonus and then log on to their trading account or call their broker to buy stock in the company they work for. That is because with cash you can choose any investment available to you whether it be equities, bonds or something else entirely. If you think of vested stock as cash (which it can be with a few clicks of the mouse) then it should be treated like cash and reinvested for the best possible returns available to you at that time. If that is your own company and you are not worried about diversification then fine but for most people there are better, safer or higher yielding investments out there so sell those stocks when they vest, repurpose the cash and start maximizing your investment returns.