The impact of holding a concentrated stock position

If you have a large portion of your investment portfolio in a single stock, you have a concentrated stock position. Company founders, board members, senior management and other employees who are compensated in company stock often end up with concentrated positions. Investors can also amass shares over time or inherit a large position in a single stock.

These large holdings can add concentration 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 trading volume high enough to diversify?

If the stock you hold has high daily trading volume, the simplest option may be an outright sale. You can sell your entire position at once if there is enough demand, or you can sell gradually and look for 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. Many diversification techniques require enough market demand to support the sale. If the stock doesn’t have enough trading volume, a secondary offering or block sale might be an option to discuss with your advisor.

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

If volume is available, how can I sell my stock?

The simplest approach is an outright sale, and there are several ways to do it. You can sell your entire position at once, assuming the volume will support the trade; sell over time, looking for attractive price points; or – especially if you are an “insider” of the company or otherwise concerned about insider trading liability – sell under a Rule 10b5-1 trading plan.

What is a Rule 10b5-1 plan?

A 10b5-1 plan allows a corporate insider, such as an executive or board member, to instruct a counterparty, such as J.P. Morgan, to sell company shares under specific parameters like price, timing, amount or other conditions, as set forth in the predetermined plan.

The plan must be adopted at a time when you are not aware of material nonpublic information. When the counterparty later executes sales under a qualifying plan, you may have an affirmative defense to insider trading liability, subject to applicable requirements. A 10b5-1 plan can also force you to follow a disciplined sales approach, helping take emotion out of your decisions.

If you think you might be interested in a 10b5-1 plan for your company stock, you can coordinate with a J.P. Morgan professional and your independent legal advisors.

What else can I consider for a concentrated stock position?

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, charitable contributions, block trades or secondary offerings. You can also consider derivative-based strategies, depending on your goals and whether they make sense in light of the rest of your portfolio. Finally, depending on the stock’s characteristics, you might qualify for a “qualified small business stock” exclusion from some or all capital gains.

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

View Disclosures