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Wealth Planning

The impact of holding a concentrated stock position


If you have a large portion of your investment portfolio in a single stock, you are in a concentrated stock position. Company founders, board members, senior management and other employees and individuals who might work for a public company and be compensated in part in its stock often end up with concentrated positions. Even some investors can amass shares over time or inherit a large position in a single stock.

These large holdings can create unwanted risk to your portfolio and may be difficult to sell, even when the stock is publicly traded. If you are looking to diversify—that is, to sell some or all of your concentrated position to buy other investments— it’s important to speak with an advisor and ask yourself the following questions:

Is the average daily volume high enough for me to diversify?

If the stock you hold has a large daily demand, the simplest option is an outright sale. You can sell your entire position at once, if there is demand. Or you can sell gradually and pick attractive price points.

Sometimes your position—especially if you are a founder or other large holder—is far larger than the average daily trading volume. Most diversification techniques require a large amount of trading. So if the stock doesn’t trade enough, a secondary offering or block sale might be your best option to discuss with your advisor.

Company executives, board members and large shareholders should always consider insider rules, which may place conditions on when and how you can sell, before any sale. Discuss goals for your portfolio and alternatives with your advisor to help you comply with these rules.

If the volume is there, what are my alternatives if I just want to sell stock?

The simplest alternative is an outright sale. There are several ways to do this. You can sell your entire position at once (assuming the volume will support the trade); you can sell over time, picking attractive price points; or—especially if you are an “insider” of the company or otherwise worried about insider trading liability—you can sell under a so-called “10b5-1” sales plan.

What is a 10b5-1 plan?

A 10b5-1 plan is a plan by which a corporate insider, such as an executive or board member, instructs a counterparty, such as J.P. Morgan, to sell company shares under specific parameters like price, timing or other targets, as set forth in the pre-determined plan.

The plan must be signed at a time when you have no material non-public information. When the counterparty later executes sales under the plan, you have a defense to any charge of insider trading, since the plan was put in place when you had no material non-public information. A 10b5-1 plan also forces you to follow a disciplined sales approach, taking the emotion out of your decisions.

What are my other options?

If you don’t want to pursue an outright sale, or market demand won’t allow it, your advisor can discuss other options such as exchange funds, charitable remainder trusts, employee stock ownership plans and charitable contributions. You can also consider a number of derivative-based strategies, depending on your goals and if they make sense in light of the rest of your portfolio. Finally, if your stock has certain characteristics, you might qualify for a “qualified small business stock” exclusion from capital gain.

If you have any questions about any of these techniques or more broadly about your concentrated position, please contact a J.P. Morgan advisor.

 

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This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read all Important Information.

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J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

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