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# Still thinking about ESPP

Are you bored yet? Probably :) I'm not!

The internet is generally of the opinion that you should sell your ESPP stock as soon as possible, paying the penalty (in extra tax) of a disqualifying distribution.

The calculators I've made so far only show a pretty nice benefit for holding the stock. So why sell as soon as you can?

- The increased risk that comes from holding the stock for a longer period of time. The increased profit from holding is a small part of the total profit, so a small swing in stock price or a market downturn can wipe that out
- The higher interest rate you calculate when you sell early. Since you've only tied up your money for a few months on average when you sell immediately, you can multiply or (dubiously) compound the interest rate
- The lack if liquidity when you tie up your assets for 18 months. If you calculate an IRR on the immediate sale, it's real big! Not so big when you hold for 18 more months.

It's very hard (for me) to calculate the risk, let alone visualize it in an interesting way. In the spreadsheet that led to the first calculator, I also figured the amount the stock price had to drop to wipe out the extra profit from a qualified distribution. I'm hoping I'll find a way to demonstrate this in the future.

Figuring out the correct rate of return to use to value an early sale is also a little complicated.

The various formulas I found online to calculate a yearly interest rate by averaging the time the money is held to 3 months, and then multiplying, or by compounding the interest by quarter (when there really is no compounding) are dubious.

IRR is definitely the "most right" mathematically, but it's a metric that is normally used to choose between two projects or investments. It doesn't necessary mean a lot for an individual whose second choice investment is a checking account or mutual fund - at the end of the day, you've got at 10% profit at the end of 6 months, or a slightly higher profit at the end of 24 months. You're lucky if you get ~5% anywhere else, so maybe it *does* make sense to let the money ride.

Assuming that you are employed (which you are, because you have an ESPP), and not in dire financial straits, sacrificing liquidity of a relatively small amount of money isn't a terrible cost, and I think the IRR method drastically overvalues that cost for an individual of modest means (as opposed to a large corporate entity which is going to do *something* interesting with its chunk of cash and wants to find the most interesting thing it can do)

Finally, I have a gut feeling that since the ESPP limits you to 2 purchases per year, it's worth less than something you can invest in at any time, and the IRR method doesn't take that into account.

However with no good way (for me, yet) to calculate the extra risk in holding the stock longer, I think IRR is probably a good upper bound on how much more attractive it is to sell the stock immediately. The next iteration of the calculator will compare IRR for each scenario, and I'll also try to find someone with more financial acumen than I have to advise me on what IRR really means, and how to calculate the risk from holding the stock longer.

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