When Doubling Down Isn't Worth It

Many employees are given the opportunity to purchase company stock, via a discounted purchase plan, in an RRSP, with a company match, or stock options. This can be a small or large portion of the employees' total compensation, and, particularly in the case of stock options, encourage an employee to stay with the company. So what are the downsides?

The largest risk is lack of diversification, essentially that your employment and your investment are in the same place. If your company suffers difficulty, your employment and your investment are in jeopardy. Also, many employees, "drink the kool-aid" and overestimate the potential of their company compared to others in the industry. They don't pay the same critical eye as they would to other investments.

So what to do? In my case, I can purchase 10% of my salary in stock at a discount. So I purchase the stock at the discount, and then immediately unload the shares to gain the discount. I reinvest the proceeds in other investments.

Which brings to me to the next point, you need to carefully evaluate the terms, conditions and tax implications of accepting the advantage stock. In my case, the only disadvantage is that the discount is taxed as income, not as a capital gain. If you take stock options, there will be vesting requirements, that will tie you to the company. At executive and director levels, there can be mandatory share ownership requirements, to force the executive to have skin in the game with the company. Although, these levels are usually compensated well enough to manage the risk in other ways.

At the end of the day, you need to carefully consider the gains available from taking company stock, evaluating the terms, and any tax implications, and avoid putting too many eggs in the company basket. Look for opportunities to take the gains, but then sell the stock and place the profits elsewhere to avoid taking too much risk in one place.

What is a Trailing Stop?

Many investors, like myself, are primarily buy and hold investors. However, there are some slightly more advanced techniques, that can help to protect from losses, lock in gains, and remove emotion from investing.

One of the techniques that I use is a trailing stop. To be able to understand a trailing stop, first let's understand a stop or stop-order.

A stop is simply a request to buy or sell a stock at a certain price. If you own a stock, you can set a stop price to lock in profits, or limit losses. You set a stop below the current stock value and then if the stock drops, you will sell and be protected from losses. As the stock moves, you can adjust your stops to track the stock price, to lock in higher gains.

Which brings us to a trailing stop. A trailing stop automatically tracks the closing high, setting a stop a certain percentage below the closing high. For example, let’s say you buy a stock at $40 with a 10% trailing stop. So the stop (sell) price would be at $36. Then the stock rises to $55 over time. Then the stop (sell) price would be $50. The stock falls to $50, the stop is triggered, and you sell at $50, locking in a $10 dollar gain.

You can use this to follow a stock upwards. Let's say you hold a stock and you want to maximize your gains, but aren't sure if you should sell (or when you should sell). The trailing stop will lock in your gains as the stock goes higher, but then when it moves down, will lock in those gains.

The key is to set the trailing stop percentage wide enough that a sell won't be triggered by noise, but narrow enough to lock in a reasonable gain. You can either look back at the stock's history to get an idea of the variation.

You can set up a trailing stop with an investment account. In my case, I am with BMOInvestorline, and there is no cost to set-up a trailing stop, only commission to be paid if the stop is triggered. Also, it can only be done for stocks above $5, and in lots (a lot is 100 stocks).


This post is linked in: My Wealth Builder, My Money Counselor

High Interest Savings Accounts

What to do while I wait to build up some funds? A stack of bills under my mattress won't do me much good. I went looking around for some high interest savings accounts. Most of the major banks have some kind of a higher interest option, one maybe two percent. That's not very good, the better options are high interest savings accounts from discount banks. These banks are usually characterized by having little to no storefront presence, and their business is primarily conducted online. You usually have to submit an application form, have a social insurance number, and submit a cheque payable to yourself so that the accounts can be linked. Once your account is linked you can move funds by Electronic Funds Transfer.

Some of the options out there are:

Citizens Bank Investment Account

Citizens Bank Ultimate Savings Account

HSBC High Rate Savings Account

ICICI Bank HiSAVE Savings Account

ING Direct Investment Savings Account

The plus side is that these are all CDIC insured, the only drawback is the potential for slightly lower customer service. Personally, I've opened an account earning 3% with ING, not big dollars, but somewhere to put the cash for now.