I have a semi-annual plan with a 15% discount off of the lower price of the beginning or the end of the 6 month buying period. I sell immediately to lock in the guaranteed 30% annualized return. Having an automatic sell plan also eliminates any risk of insider trading. The downside is I pay earned income tax on the 30% return of roughly 30%, bringing my post-tax return to roughly 20% annualized. Additionally, I’m only out the initial investment into the ESPP for a maximum of 6 months.
If I hold the stock for a year after the buy date, I have a maximum time since the initial investment of 18 months. During that time, I have no guarantee of where the price goes. Assuming it stays static, I have made a 15% profit over 18 months, or 10% annualized. I still get to pay taxes, but at the lower rate of 15%. Accounting for taxes, my annualized return is now 8.5%.
Obviously, it could be much higher or much lower depending on the stock price, and as noted, I am assuming a static stock price to make this comparison. Additionally, my investment is spread out in equal payments throughout the 6 month enrollment period. The average time to sell is 3 months for the immediate sell and 15 months for the long term capital gains rate, which exacerbates the gap.