MONEY COMMENT
Shares With A No-Lose Guarantee

By Cliff D'Arcy
June 18, 2003

In case you weren't aware, we're big fans of investing in shares here at the Fool. Over the long term, shares have beaten other mainstream investments, and we expect them to continue to do so in the future. What's more, anything that enables investors to buy more shares for their money gets a round of applause from us.

The hefty stock-market fall since 1999 has dented investor confidence and scared away countless investors from investing. Many are looking around for safer alternatives to direct investment in shares - might we suggest taking a look at employee share plans?

According to the latest press release from Proshare, an independent organisation that promotes wider share ownership and financial education, over 1,200 UK companies offer Save As You Earn (SAYE, or Sharesave) schemes. We think these plans are very Foolish investments indeed, because you can make substantial gains without risking any of your capital.

Here are the benefits of investing using a Sharesave plan:

• You can save from £5 to £250 a month, usually for three, five or seven years (three years is the most popular option).
• You earn a tax-free cash bonus once you've made all of your monthly payments. On a three-year scheme, your bonus is one monthly payment, equivalent to an interest rate of 1.74%.
• Payments are taken directly from your salary, which helps if you're not used to the discipline of regular saving. SAYE helps you to save first and spend later!
• When your contract matures, you can use your payments and bonus to buy shares in your employer - at a discount of up to 20% off the market price shortly before your contract began.
• If your employer's share price has gone pear-shaped, you can take your cash and run - without losing a penny of your capital.

Sadly, Proshare has reported decreasing take-up rates among employees, with under a quarter (24%) of eligible employees participating in three-year SAYE schemes. Nevertheless, the Foolish employees that are participating in SAYE have increased their monthly contributions from an average of £52 to £61.

Perhaps falling share prices have discouraged employees, as around half of all current schemes are under water (i.e. with option prices above current share prices). However, this shouldn't be a problem, as employees can withdraw from existing plans at any time and join the next plan at a lower option price.

Here's a practical example:

Harold saves £100 a month into the SAYE scheme offered by his employer, HappyCo, which gives him the right to buy HappyCo shares at 80p in three years' time. Note that HappyCo's shares trade at £1 before Harold's contract even begins, an instant return of 25%.

When his three-year contract matures, Harold's plan is worth £3,700 in cash. If the market price of HappyCo's shares is below 80p, it's not worth Harold using his money to buy the shares at 80p and he should take his cash.

As it happens, HappyCo has done well and its share price increases to 160p over three years. Harold sensibly "exercises his option" and HappyCo gives him 4,625 shares (£3,700 / 80p = 4,625). Harold promptly sells his shareholding for 4,625 x 160p = £7,400.

So Harold has made a profit of £3,800 on his £3,600 investment in just three years - with no risk to his capital. Tasty!

One of my chums saved £250 a month for five years in a SAYE scheme with his employer, a leading supermarket. He made a profit of around £40,000, which was completely tax-free because he sold them in stages to avoid paying Capital Gains Tax!

So, don't be put off by falling share prices - you should still invest in Sharesave schemes with confidence. Take the advice of legendary US investor Warren Buffet and "be greedy only when others are fearful."

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