Employer's Stock, the Pros and Cons

Like many employees, you might have the option of purchasing stock in your company through your 401(k).

Many employers, like health care company Gilead Sciences (Stock Quote: GILD), sweeten the deal by offering their stock at discounted prices. Others, such as FirstEnergy (Stock Quote: FE) and Sempra Energy (Stock Quote: SRE), offer matching 401(k) contributions in the form of company stock.

Purchasing your company's stock can have benefits for both you and your employer, but investing too heavily can have negative consequences. That's why it's important to understand the pros and cons of investing in your company's stock -- and to find the right balance in your 401(k) assets.

The pros: One of the best reasons for investing in your company's stock is that it gives you some sense of control over your own financial future. When you feel you have a personal investment in a company, you'll work harder to ensure its success, and you'll feel a greater loyalty to it. If your efforts pay off and the stock rises, your financial stability rises with it, especially if you purchased the stock at a reduced rate.

There are benefits for employers as well. Offering stock options helps companies recruit better-qualified candidates, and motivates current employees to perform at the top of their game. Employers who offer stock options also find less turnover and better morale among their work forces, according to a 2000 report by the National Commission on Entrepreneurship.

The cons: On the flip side, owning too much company stock can have its drawbacks. Just ask the employees of Enron, WorldCom, Lehman Brothers and even General Motors (Stock Quote: GM). By investing heavily in company stock and depending on the same company for your salary and benefits, you're essentially staking your financial security on a single firm. Should the company hit a shaky spot, your financial future can start to tremble as well.

In addition, some companies place limitations on how much stock you can buy and sell, which limits your ability to freely manage your assets, especially if the stock should start to slide. (However, federal legislation passed in the wake of the Enron debacle mandates that companies that match employee contributions with company stock must allow employees with three or more years of service to transfer the company stock's value into other investments.) Other companies have placed a cap on how much company stock employees can hold through their 401(k)s.