If you have equity compensation like stock options, you might wonder: Should I exercise my options now? If so, do I then sell the shares right away? Or should I hold my shares and wait until the stock price goes up?
‘Should I sell my stock?’ is a common question that our clients with stock options often ask, and I can understand why. Selling shares of company stock means getting cash now – which can help you fund big goals or address important financial priorities, like getting out of a concentrated position.
But the alternative may appear to be even better, especially when you believe in your company’s future and feel confident that it will only continue to succeed. If you hold your shares in hopes that they increase in value over time, that might mean even more cash later.
What Issues Should I Consider Regarding My Non Qualified Stock Options?
To understand what the best decision looks like for your situation, start with our primer on the basics of equity compensation. Then, ask yourself these specific questions about the company shares you own:
What’s the Primary Concern That You Want to Address?
You need to start by understanding why you’re asking this question about selling shares of company stock in the first place. What is your primary objective for these assets? How do you view them in your financial plan?
If you have many short- to mid-term projects or spending plans that you want to fund, that could lead you to a very different decision than if your very top priority is growing your assets as much as you can to achieve a massive financial goal like financial independence.
Understanding your main aims regarding your comprehensive financial plan can clarify the correct way to leverage your equity compensation.
Do You Look at Your Shares as Fast Cash or Long-Term Assets?
Equity compensation might not come in the form of cash like your paycheck does, but it is still compensation for the work you perform – and it’s valuable. Some people simply prefer to exchange the equity for cash and sell their company stock as soon as possible.
Other people may prefer the opportunity that equity compensation provides in that it is an asset with growth potential. If anything, straight cash is subject to inflation risk, meaning it could lose value over time. But shares of stock are different in that they come with an expectation of a larger future return.
If you prefer to simply get the cash value from your company stock, selling as soon as you can might make the most sense. On the other hand, if you view your company stock as part of your larger investment plan, holding it for some time could provide you with the best course of action.
How Do You Feel About Your Company’s Future Prospects?
Generally speaking, we want to avoid emotional decisions regarding financial planning. This is especially true when it comes to investment decisions, where emotions can hijack a solid plan and strategy and lead to major, costly mistakes.
But no one makes financial decisions in a vacuum. While I don’t believe in trying to predict any company’s future performance, I also understand that hardly anyone says, “This place is really going downhill and is going to do poorly in the future.” If you felt that way, chances are, you’d be looking for another job.
It’s usually the opposite: people with equity compensation often enjoy their work, like their employer, and believe in the company’s power, and they want to participate in what they see as the inevitable growth of the business.
It doesn’t make sense to pretend you don’t feel this way about your company (and its stock) if it’s how you genuinely feel. But, you need to balance the desire to be a part of the potential growth with that reality: growth is not guaranteed, and there are no promises with investments.
If you feel strongly about your company’s future but still wonder if you should sell your stock, don’t ignore the question. You may want to hold onto some of the shares rather than sell them all. Just make sure you have a plan to help keep those emotions in check.
For example, we recommend clients hold no more than 10 percent of their liquid assets in concentrated positions like company stock to avoid exposing themselves to too much risk and volatility.
What About Your Future Prospects with the Company?
The other thing to consider about the future is how the company will do and how your role there may change or evolve. If you continue to excel and move up the ranks of the business, that may impact your compensation and the type or amount of equity you receive.
Do you see yourself getting more company stock in the future? If so, you may consider diversifying as you get more equity. Setting up a rule for managing company stock grants over time can help you sell company shares when appropriate, especially when you know more stock is coming your way.
Or maybe you feel your current grant of stock is a one-time event. If so, holding some of those shares (or more than you would if you knew additional stock would follow) might make sense so you can continue participating as a shareholder.
How Do You Think About Potential Gains and Losses?
This might be the most important question of all, and it actually has nothing to do with your company or its stock specifically. It’s a much more general question that requires some level of self-awareness and understanding of how you are likely to react in a given situation.
It’s also the best way to tell your true risk tolerance when it comes to investments and assets you own.
So, what would be more disturbing to you: selling a share of stock for $50 today but then watching it rise to $100 next year?
Or would it bother you more to own a share worth $50 and decide to hold it because you believe in the company’s potential, only to have it be worth $25 in a year and your opportunity to sell at a higher price wasted?
For many people, the idea of loss hurts worse. To know you could have made a certain profit if only you had acted sooner is a real cause of investment regret.
Depending on how you feel about this hypothetical, that might help indicate whether it makes more sense to sell your company stock now and lock in the cash value – or if you prefer to accept the risk of loss of value and hold shares to wait and see what happens in the future.
Sell or Hold? Making the Right Decision for You
There are no objectively right or wrong answers when it comes to deciding whether to sell shares of company stock or hold them. It depends on your goals, preferences, and overall financial plan.
The next time you find yourself wondering, ‘Should I sell my company stock or hold it?’ remember this: the only truly “bad” way to go may be in not taking any action at all or lacking a strategy for how you’ll approach the answer. The bottom line is that you need to make some kind of decision, and if you’re unsure which way to go, talking to a financial planner could help you weigh your options and make an informed decision.
Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, New York, with offices in Ithaca, NY and Portland, OR, founded by Paul Sydlansky, CFP in 2016 to provide financial planning for busy mid-career professionals with young families. LRA partners with couples long-term to build financial plans that allow them to live the life they want while preparing for the future by making smart money moves to grow their wealth. They can be reached by phone at the Corning, NY office at (607) 463-8400, Ithaca, NY office at (607) 438-2914, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://www.lakeroadadvisors.com/
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
