Good economics but not a good idea.
One way to participate in your company’s ESPP allows you to make a profit with hardly any risk at all. I’m reluctant to recommend this practice, however.
Flipping
The approach is usually called flipping. You buy shares at a discount through the ESPP and sell them immediately after the purchase. Not all companies with ESPPs permit an immediate sale, but at most companies you can sell the shares a day after your purchase, or perhaps a few days later if there is a delay in transferring the shares into your account.
Many of these plans provide a discount, which can be as great as 15%. In addition, many plans have a “lookback” provision that allows the discount off the stock price at the beginning of the offering period if that price is lower than the price at the end of the offering period. That means you may be buying shares even more than 15% below their current value. Selling the shares immediately after the purchase — “flipping” the shares — locks in your profit, except in the extremely unusual situation where the stock price happens to fall more than 15% in the short period of time between your purchase and sale.
Reservations about flipping
Although flipping may be permitted by your employer and perfectly legal, it isn’t in keeping with the purpose for which the plan was designed. The plan is intended to provide an advantageous way for you to acquire stock in the company where you work. That’s good for you, and also good for the company, because workers who own stock care more about how well the company performs, and as a result the workers perform better. More broadly, it’s good for the economy when workers and companies perform better. Congress created special tax rules for these plans, and your company decided to adopt the plan, with this purpose in mind. This is why I personally don’t recommend flipping shares, even though it may be to your economic advantage.
Stock options are different
You may be aware that in many cases I recommend immediate sale of shares acquired by exercising stock options. That’s different. Stock options aren’t issued at a discount. Furthermore, when you hold a stock option, you have an equity interest in the company even before you exercise the option. During the entire holding period, which is often four years or more, you care whether the stock price goes up or down. Stock options serve their purpose of making you care about (and profit from) changes in the stock price even if you sell the shares immediately after exercising the option, so these sales don’t defeat the purpose of the stock option plan.
Bottom line
For me, the bottom line is that participation in an ESPP should be based on a decision that you want to make an investment in shares of the company where you work. It doesn’t have to be a permanent investment, of course, but because flipping is inconsistent with the purpose of the plan I don’t recommend participating with the intent of selling the shares immediately after purchase.