Not all stock ownership plans are available to every employee however. Some stock compensation schemes are directed only at executive-level staff, often in a bid to attract senior or key business figures to the company.
In addition to company-sponsored schemes, employees are also permitted to purchase stock directly, subject to certain rules and restrictions.
Why Do Companies Give Shares To Employees?
Employers have long recognized the benefit of giving employees a stake in the business they belong to. Share ownership schemes help incentivize employees to hit targets and generate profits for the company, aligning their own interests as stock holders with their performance on a day-to-day basis.
Businesses can also conserve much needed funds by offering stock compensation options to employees instead of upfront cash or wages. Companies such as startups, which are usually cash-poor, often use this approach in the early days of their life-cycle.
Is It Good To Invest In The Company You Work For?
Not only do employers benefit from making it easier for workers to own stock in their companies, but employees benefit enormously too.
Stock options make saving for retirement so much more efficient, and when employees feel that their managers have their best interests at heart, job satisfaction, security and performance are all improved too.
What Is Insider Trading?
Insider trading is what happens when someone considered to be a company insider buys or sells stock in a company.
An insider is defined as anyone privy to valuable, material non-public information pertaining to an organization in question, or someone that owns stock in a company that is equal to or more than 10% of that company’s equity.
Company insiders don’t actually have to work for the company; rather, they simply need to have sufficient knowledge of the non-public information about the company.
Is Insider Trading Illegal?
Trading by insiders is not necessarily illegal. In fact, there are many examples of legal insider trading, such as when employees purchase stock in their own company, or when C-suite executives embark on a share buy-back scheme for their business.
That being said, insider trading is tightly governed through rules set by the SEC, which requires that share transactions are registered and conform to certain standards.
Where insider trading does become illegal, however, is when non-public information is used to inform stock trades by insiders which is intended to result in profit from the knowledge of that information. There is often complicated factual and legal considerations to be made in determining who exactly is an insider, what information is truly non-public, and whether anyone profited wrongly from a trade.
The SEC points out that insider trading is typically characterized by the trading of a security that breaks a fiduciary duty or any other type of relationship which is based on one of trust and confidence.
Certain economists and legal experts believe that all insider trading should be made legal. Some arguments cite the idea that insider trading constitutes a victimless act, while others claim that insider trading should be protected under free speech laws.
Milton Friedman, on the other hand, argues that insider trading actually benefits investors because it delivers new information to market traders, thus making the market more efficient.
The SEC takes illegal insider trading seriously, and makes strident efforts to crack down on its practice. One of the main ways that the SEC attempts to suppress insider trading is by tracking unusual and anomalous trading patterns. The body uses sophisticated analytics tools to determine illegal activity, while also employing the more prosaic method of taking tip-offs from industry insiders concerned about their colleagues’ suspicious behavior.
Can I Invest In A Private Company I Work For?
It’s typically much easier for an individual to invest in a publicly traded company than it is a privately held one, but there are certainly opportunities, and many good reasons, to invest in a business when it’s still at the private stage of its development.
However, there are significant risks and barriers to entry for an employee wishing to invest in the private business they work for.
To begin with, there is a certain set of criteria that must be met for individuals to become private investors, including lofty wealth requirements needed to become an “accredited” or “sophisticated” investor. Furthermore, SEC rules mandate that accredited investors must also hold various professional qualifications and industry experience before they can begin investing in private companies.
But if these standards are met, investing in private companies can be a very rewarding occupation. And while considered more risky, private enterprises often deliver a higher rate of return on investment when the company is successful, with investors normally able to secure more preferential investment terms than they would with an investment in a public company.
Can I Invest In My Own Company?
Company owners can, and often do, invest money into their own enterprise projects, most especially during times of hardship for their business, or at the outset of a company-building process when outside funding is hard to come by.
However, there are many rules governing how this is done – some depending on how the business is incorporated in law, and some depending on what kind of investment is being made.
For instance, if a company owner is operating a partnership or limited liability company, and wants to inject funds into their business by way of a loan, this would entail adhering to a different set of rules than if the business was a corporation and the funds were delivered through stock acquisition instead.
Can A CEO Buy Stock In His Own Company?
So long as the regulations surrounding illegal insider trading are not broken, a CEO could definitely buy stock in his own company.
In fact, monitoring the selling and buying of shares by company insiders is a tried-and-true way of gauging the health and investment prospects of a business.