Reviewed by Somer Anderson

There are two main markets where stock transactions are conducted. One is the primary market and the other is the secondary market. Each has different functions.

Primary market shares can be difficult to obtain. Decisions about the allocation of new shares are made by a company’s founders and owners and the investment banking firm underwriting the offering.

Any investor can buy shares of stock in the secondary market (as long as they’re available for sale) because at that point, shares trade openly in the public domain.

Key Takeaways

• When companies offer their first shares of stock to the public, the offering takes place in what’s called the primary market.
• These initial public offerings of stock are usually handled by underwriters on behalf of companies.
• The secondary market, or stock market, is where shares trade back and forth after an IPO.
• Secondary market investors have one business day to pay for their purchases.
• To allow a stock price to stabilize, company insiders who receive shares in the primary market usually can’t sell them in the secondary market for up to 180 days.

The Primary Market

Private companies become public companies when they issue new shares of stock to investors by way of an initial public offering, or IPO. This initial, or primary, offering is conducted in the primary market. It is the first sale of new shares of stock.

Usually, one or more investment banks/broker-dealers underwrite the issue. That means the bank or syndicate takes on the financial risk of buying the initial shares from the company and selling them to various investors (at a higher price).

The terms of the IPO indicate how many new shares will be sold to institutions and how many will be sold to individual (often wealthy) investors. Usually, these parties are clients of the underwriting firms.

Prices on the primary market are set prior to the IPO, so investors know how much they will pay for shares of a company’s stock.

This market is usually dominated by sophisticated and experienced investors, such as banks, pension funds, institutional investors, or hedge funds.

Note

Effectively, investors participating in the primary market buy stock directly from the issuing company. Investors within the public-at-large can then buy and sell the company’s stock when it starts trading in the secondary market.

The Secondary Market

The secondary market, commonly known as the stock market, is where investors buy and sell existing shares of stock from other investors. When you give your broker a stock order or enter it yourself online, its execution occurs in the secondary market.

Secondary market trading of IPO shares usually begins hours after the IPO is complete.

The proceeds of secondary market sales go to the selling investor, not to the company that issued the stock or to the underwriting bank. 

Stock prices in the secondary market fluctuate according to supply and demand.

The Shareholder

A shareholder is any individual or entity that has legal ownership of a company’s shares. For example, if you are a shareholder in Microsoft, your name is recorded as such on the books of Microsoft.

When you buy stock from another investor in the secondary market, the next business day, funds to pay for your purchase are moved from your account to the seller’s account. And securities are moved from the seller’s account to yours.

At that time, as noted above, your name will appear in the company’s record books, and you will be deemed the holder of record.

The investor from whom you purchased the shares will, at the same time, be removed from the records. They forfeit all associated rights to the shares, such as voting rights, and any dividends, distributions, or further capital gains (or losses).

How Can I Get Shares in the Primary Market?

Your broker may have access to IPO shares so talk to them if you’re interested in an upcoming offering. Bear in mind though that, frequently, the availability of IPO shares is restricted to institutional investors and wealthy, high-value individual investors.

Can I Sell Shares I Got in an IPO Immediately in the Secondary Market?

Not if you’re a major shareholder. Usually, company employees, founders, and owners, and shareholders with majority stakes, are required to hold IPO shares for a specific period of time (e.g., 90 to 180 days) before selling them. This is intended to keep immediate selling pressure from depressing the share price when shares first start trading in the secondary market. This lock-up rule is self imposed by companies that go public and is part of the terms of the IPO.

Do Shares Always Close Higher in the Secondary Market After an IPO?

No, they don’t. Investors often see excited trading of hot stocks immediately after an IPO. And prices can jump higher. However, where they trade and close depends on things like demand, market conditions, and investor outlook.

The Bottom Line

Investors buy shares of stock in the primary market and the secondary market. The primary market handles the initial offering of newly issued shares of stock from a company that is going public. The company sells these shares to specific investors.

The secondary market, or the stock market, is where shares are bought and sold after an IPO. These existing (no longer new) shares are bought and sold by any investor who wishes to own or dispose of them.

They can be a secure way to avoid outliving assets—but watch out for fees

Fact checked by Vikki Velasquez

What Is a Retirement Annuity?

A retirement annuity is a financial product that provides an income in retirement. It is similar to insurance (some annuities are regulated as insurance products) in that you make regular payments to the annuity company. In return, the annuity company will pay you a set amount of money periodically, with the timeline specified in your annuity contract.

In some cases, an annuity payment can continue after a retiree’s death and be paid to a spouse.

These products are designed to provide a reliable income during retirement that will last as long as you live. While this is appealing to many workers who are concerned about their ability to save enough for retirement, annuities often have drawbacks, particularly their costs and fees, compared with other retirement investment accounts.

Before purchasing a retirement annuity, it is important to understand the advantages and disadvantages.

Key Takeaways

• A retirement annuity provides a guaranteed, regular income for a retiree until their death and sometimes after as a benefit to a spouse.
• Retirement annuities are often funded in advance, either through a lump-sum payment or through regular premiums over several years.
• Annuities may provide fixed, indexed, or variable payments depending on the terms of the contract.

Advantages of Retirement Annuities

Retirement annuities have several benefits, such as…

• Lifelong income
• Deferred taxes
• Guaranteed rates of return
• The possibility of growth

Lifelong Income

The main appeal of a retirement annuity is the guaranteed income that can last for the remainder of your life. “For people who are more cautious and want less risk, annuities can offer some peace of mind with a predictable stream of income,” says Melissa Joy, CFP, CDFA, founder of Pearl Planning. With an annuity, you don’t have to worry about outliving your retirement savings, no matter how old you live.

Deferred Taxes

With some investments, such as certificates of deposit (CDs), you may owe taxes when they reach maturity. However, you won’t owe taxes on an annuity until you withdraw funds. This can help you manage your tax burden strategically throughout retirement.

Guaranteed Rate of Return

Fixed annuities have guaranteed rates of return. You know exactly how much you’ll receive monthly once you start claiming your annuity payments. This guaranteed income can provide peace of mind, in addition to making retirement planning easier by allowing you to plan which sources of income you will tap into at different stages of retirement.

Possible Market Growth

Variable or indexed annuities trade predictability for the possibility of growth. These annuities allow you to benefit from a strong market and receive a higher income than you might otherwise expect.

Disadvantages of Retirement Annuities

While retirement annuities have many advantages, they must also be carefully considered for their disadvantages, which include…

• Complex contracts
• High fees
• How they are taxed
• Illiquidity
• Inflation risks

Complex Contracts

Annuity contracts can contain many riders and extra provisions, which can quickly become complicated. “Each product has its own set of rules and features, and that leads to a lot of confusion,” says Joy. “If you’re going to pay for those fancy features, make sure you have a plan to actually use them.”

High Fees

Annuities often have many fees and penalties baked into them. “The costs can be steep,” Joy warns. “There are fees and penalties. There might be surrender charges or ongoing expenses. A lot of times annuities get sold with riders which enhance the guarantees you get but come with more costs.”

Even without additional penalties or riders, the basic costs of annuities can be up to 3% per year. “If there’s not a clear conversation on costs with the person selling you the annuity, that’s a red flag,” says Joy.

Taxed As Ordinary Income

Taxes on annuities can be complex. While taxes on the interest and investment gains are deferred, once you take withdrawals, the net returns are taxed as ordinary income. In most tax brackets, this is much higher than the rate you would pay on investments that qualify for the capital gains tax rate.

Lack of Liquidity

Many annuities have a surrender fee, meaning you’ll pay a substantial penalty if you try to take an early withdrawal. The surrender period will depend on the type of contract you sign, but six to eight years is typical.

“Annuities are not a good fit for people who want a lower-cost portfolio or people who want more control over when they can access their funds,” Joy advises. “You need to know what you’re getting into.”

No Inflation Adjustment

The guaranteed income of an annuity can be comforting if you’re worried about running out of money in retirement. But unlike the Social Security system, annuities don’t have a cost of living adjustment built in.

“They aren’t necessarily structured to take inflation into account,” explains Joy. “So what you’re agreeing to today might not be worth as much in future dollars.”

Types of Annuities

It’s important to understand the different types of retirement annuities available to fully understand their benefits and drawbacks. While the specific structure of an annuity will depend on the company offering it and the terms of its contract, most consumers will be able to choose between a few common options.

Fixed vs. Indexed vs. Variable Annuities

A retirement annuity is typically funded with either a lump-sum payment or a regular series of payments, similar to an insurance premium. However, the income you receive from it once annuitization begins will depend on whether you select a fixed, indexed, or variable annuity.

A fixed product provides a set payment that remains consistent over the life of the annuity. With a fixed annuity, you know exactly how large your payments will be and for how long you will receive them.

An indexed annuity is an insurance contract with a rate of return pegged to a stock market index such as the S&P 500. This allows you to receive higher payments when the stock market is doing well but, because it follows a broad index, has less risk associated with it than a variable annuity.

A variable annuity is the riskiest type of annuity, though it also has the greatest possibility for growth. The rate of return for these annuities is based on the performance of investment options that you choose when you purchase your annuity.

Note

A variable annuity contract may offer a guaranteed minimum withdrawal for an additional fee. This would provide a baseline income even during market downturns.

For all these types of annuities, you also select the length of the annuity, which can be:

• A set number of years
• Your lifetime
• Your lifetime plus your spouse’s lifetime

Immediate vs. Deferred Retirement Annuities

An immediate annuity is funded by a lump sum payment and begins paying you an income right away. This type of product is also known as an immediate payment annuity or an income annuity. It’s usually appropriate for those who are already retired or just entering retirement and choose to put their retirement nest egg into an annuity to create an immediate and dependable income stream.

A deferred annuity, or deferred payment annuity, is generally part of a long-term retirement plan. It can be funded by either a lump sum or regular payments, but it doesn’t begin paying you an income until the date specified in your contract. If it is a fixed annuity, your money will accrue interest during that time. If it is an indexed or variable annuity, your money will grow if market conditions allow. However, there is the risk of loss if the market declines and doesn’t recover by the time you need to begin making withdrawals.

The Bottom Line

Annuities can be a helpful part of retirement planning for many people, but they aren’t a one-size-fits-all solution. Though they provide a reliable and predictable income that can last the rest of your lifetime, they also come with substantial costs. They can make it difficult to access more money in an emergency.

“Just like you should have a well-balanced portfolio, having well-balanced sources of income in retirement is so important,” says Joy. If you are trying to decide whether annuities should be part of your retirement income, a financial planner can help you create a retirement portfolio that fits your needs and lifestyle.

Fact checked by Vikki Velasquez

These three renowned traders are known for their financial acumen, but as these biographical sketches of each reveal, there is more to each of them than their financial successes. Here is a look into the stories behind George Soros, Michael Burry, and David Tepper.

Key Takeaways

• Born in Budapest, Hungary, George Soros is a Holocaust survivor who came to the United States in 1956 and launched a hedge fund in 1970.
• Michael Burry, the man who would be the subject of the film “The Big Short,” has a medical degree and did a residency at Stanford.
• David Tepper has been investing since his college days at the University of Pittsburgh and owns a professional football team.

George Soros

George Soros was born in Budapest, Hungary, in 1930. He is a Holocaust survivor, and he and his family survived the Nazi occupation by falsifying documents and hiding their backgrounds.

In 1947, he left Budapest for London, where he worked as a railway porter before emigrating to the United States in 1956. It was in the U.S. that Soros launched his hedge fund, Soros Fund Management, in 1970.

His investment style starts with being well-informed about economic trends on a local and global scale and using that knowledge to exploit market inefficiencies with large, highly leveraged bets. In 1992, Soros earned the nickname “the man who broke the Bank of England” for a particularly successful bet against the British pound.

Today, Soros Fund Management is a global investment firm with about $28 billion in net assets. It also manages the assets of the Open Society Foundations, one of the world’s biggest charitable foundations. George Soros’s advocacy of progressive ideals often makes him the object of conspiracy theories.

According to the company’s LinkedIn page, “SFM leverages its permanent capital base, unconstrained mandate, and 50-plus years of experience to invest nimbly across diverse strategies and asset classes, including public and private equities and credit and macro assets. SFM’s approach is unique in the investment industry.”

Michael Burry

Michael Burry was born in San Jose, California. He attended UCLA, where he earned a bachelor’s degree in economics. He earned a medical degree from Vanderbilt University and did a residency at Stanford Hospital and Clinics.

Begun as a hobby, Burry wrote a blog about investing and was active in online forums. In 2000, he launched Scion Capital, an investment fund. Joel Greenblatt of Gotham Capital was an early investor in Scion Capital. A reader of Burry’s blog, he made a $1 million investment in the investment fund.

After successfully predicting the subprime mortgage market collapse in 2008 by closely analyzing the housing market asset bubble, he created a new sort of financial instrument called a credit default swap. That allowed him to short the housing market, thus making a large profit for his investors and himself. Shortly after Burry decided to close the doors on Scion Capital.

He is the topic of the film “The Big Short,” which chronicles how Burry made a fortune predicting the collapse of the subprime mortgage market. Christian Bale portrays Burry in the film.

Burry began Scion Asset Management in 2013. He lives in Saratoga, California.

David Tepper

David Tepper was born on Sept. 11, 1957, in Pittsburgh, Pennsylvania. He was fascinated with football and baseball and attended the University of Pittsburgh, where he earned a bachelor of arts degree in economics in 1978.

Tepper started investing small amounts of money in college and received a master of science in industrial administration from Carnegie Mellon University in 1982.

Tepper worked as a credit analyst on the high-yield debt team for Goldman Sachs and, within six months, became a head trader. He worked at Goldman Sachs for seven years. He specialized in distressed debt, particularly bankruptcies and special debt situations. Then in 1993, Tepper founded the Appaloosa Management hedge fund with his former colleague, Jack Walton.

Appaloosa is a limited partnership hedge fund that uses high-risk methods such as investing with borrowed money to realize large capital gains. It bet and succeeded on bond purchases of troubled companies such as Enron and Worldcom. During the subprime mortgage crash, when sellers were driving down the value of financial institutions, Tepper was actively investing in them. Appaloosa profited in the billions when the U.S. government stepped in.

Tepper has owned the Carolina Panthers professional football team in Charlotte, North Carolina, since 2018, but he continues to act as a regular market commentator. He also owns the Charlotte FC professional soccer team.

The Bottom Line

These three renowned traders came from various backgrounds before making the leap and starting their investment funds, where they had so much success. Soros is a Holocaust survivor and immigrant from Hungary. Burry has a medical degree. And maybe the most relatable is Tepper, who began investing small amounts of money in the stock market as he studied for an economics degree. Each unique story provides a blueprint for success and sheds light on traders you may only know by reputation alone.

Reviewed by JeFreda R. Brown

Form 10-K is the most comprehensive compilation of information on a company. The Securities and Exchange Commission (SEC) requires it for all public companies.

It is the best source of information on a company, providing—among other information—a description of the business and industry, risks, a summary of legal proceedings, and financial statements. It is both a quantitative and qualitative review.

However, this document has its downsides, the most obvious of which is that it is backward-looking. Also, the 10-K can be overwhelming as the document often exceeds 100 pages in length. That said, in addition to other data investors gather on a company, the 10-K provides critical information, as it assembles an investment puzzle.

Key Takeaways

• The Form 10-K is the most detailed report on a public company, covering its complete financial information, business, risks, legal issues, and other relevant matters.
• The main sections in a 10-K include financial performance and management analysis, corporate governance, and financial statements.
• While the 10-K provides a tremendous amount of information, it is extremely long, detailed, and backward-looking.
• Form 10-Ks can be accessed on company websites and the SEC’s EDGAR site.

Breaking Down Form 10-K

A 10-K has many different sections, called items, which are broken up into parts.

Part I

Part I focuses on a description of the company and business. This section provides typically static information that is useful for any investor who requires a general understanding of the industry and company.

It has various sections including business, risk factors, and legal proceedings. Investors should review this section, even if they are familiar with the company or business, paying special attention to any changes in the language, particularly those related to risk factors and legal proceedings.

The company also will typically provide an update on the competitiveness of the industry, including business trends and any other pertinent information that may affect market share and the company’s ability to reach its goals. For example, new laws or regulations passed by the federal government that may impact the company’s ability to operate the business would be included.

Part II

Part II focuses on the company’s financial results of the operations. This includes the very important management discussion and analysis (MD&A). The MD&A informs the investor of management’s explanation of financial results and the factors that impacted the past year.

A summary of financial performance, a discussion of acquisitions or divestitures, and a comparative analysis of the current reporting year to the previous year and the previous year to two years earlier are listed here.

Part III

Part III focuses on corporate governance issues like executive compensation. It also requires information about the company’s code of ethics and certain qualifications for directors and committees of the board of directors.

Part IV

Part IV contains exhibits, including the actual financial statements. It requires items such as the company’s bylaws, information about material contracts, and a list of the company’s subsidiaries.

Getting Started

Form 10-K can be found along with other SEC-required forms and investor information on company websites, generally within an “investors” or “investor relations” section. In addition, the SEC publishes these documents on the EDGAR website.

The best place for investors who are unfamiliar with a company or industry is at the beginning of the document, Part I, Item 1: Business. An industry overview is provided to give the investor a picture of the competitive landscape, the opportunities, and the threats from a risk standpoint.

Company-specific qualitative information is also discussed, including legal proceedings specific to the company as well as to the industry. Generally, a competitive analysis is also provided; typically the names of all competitors are discussed. Investors can compare the wording of the current 10-K to the wording of the previous 10-K, zeroing in on any variations in tone to see if slight changes have occurred that may affect the future operating environment.

Important

Companies also release quarterly reports known as 10-Qs, which provide the financial performance and status of a company for each quarter.

Once general knowledge of the industry and company is obtained, more company-specific information can be ascertained in Part II, the MD&A section.

Company fundamentals, prospects for new businesses or products, and risks as well as a comparison to the previous two years’ financial outcomes are provided. In addition, business segment information is disclosed and discussed in this section.

Often companies with either multinational operations or multi-segment businesses separate the operational results from the consolidated results so investors can analyze the growth drivers for the company.

Reviewing results on a consolidated basis is useful, but understanding what drives the performance of the company via segment analysis augments an investor’s ability to determine whether the investment could be profitable in the future.

What’s in the Numbers?

Form 10-K includes the annual financial statements—the balance sheet, income statement (statement of earnings), statement of retained earnings, and statement of cash flows—for the current reporting year and up to the previous five years.

This is a good opportunity to compare annual financial performance on a year-over-year basis. Often investors use a percent of revenue method to analyze the numbers.

In addition, investors like to look at certain financial ratios to determine whether financial performance is improving or declining. The comparison across multiple years makes this information very helpful.

More 10-K Components

Form 10-K also includes the requirements of the Securities Exchange Act of 1934 and Sarbanes-Oxley regulations—the acknowledgment by management that they certify the results contained in the report. The auditors also provide an opinion based on their audit.

Many investors pass over these exhibits, but they are an important outcome of legislation after several instances of fraud resulted in shareholder loss.

On the first page, the number of shares outstanding is listed as of the published date of the report. Investors will notice that this share count differs from the numbers used to calculate the earnings per share on the statement of earnings. The number of shares outstanding used in the statement of earnings is the average number of shares outstanding during the period, not the ending value.

Filing Amendments

Form 10-K/A is compiled and filed when the company amends Form 10-K after it has been published. It is not an uncommon occurrence to file a 10-K/A. Investors should review these amendments to ensure that they do not materially change the investment thesis.

What Is Form 10-K Used For?

Form 10-K is the annual report required to be filed with the Securities and Exchange Commission by all public companies. It is a comprehensive report on the state of a company, covering everything from financials to legal troubles to governance to management and more. It is used by investors and analysts to fully understand a company. This helps with making investment decisions and recommendations. Investors can use it to determine whether they should buy, hold, or sell stock. Analysts use it for financial modeling and making investment recommendations. Journalists and researchers also use it for reporting purposes.

When Must a 10-K Be Filed?

Companies must file their 10-Ks as determined by their classification.

• Non-accelerated filer (public float of less than $75 million): 90 days after fiscal year-end
• Accelerated filer (public float of $75 million to less than $700 million): 75 days after fiscal year-end
• Large accelerated filer (public float of $700 million or more): 60 days after fiscal year-end

Why Must Companies File Form 10-K?

Companies must file Form 10-K as it is required by law. The primary reason, however, is to protect investors. As investors purchase shares in a company, they need to be fully informed of the risks they’re taking. Form 10-Ks provide investors with comprehensive financial data on a company, its business, its legal troubles, its strategy, and more.

The requirement of publicly sharing this information goes back to the 1929 stock market crash and the Great Depression when there was little regulation around financial reporting. A lot of the information provided was misleading and inaccurate. Reforms after the crash led to the creation of the Securities and Exchange Commission along with standardized financial reporting, all to protect investors from making financial decisions on bad information that could lead to financial loss.

The Bottom Line

Form 10-K provides a comprehensive review of the industry and company, which should help investors form an investment thesis. Although it is an extremely lengthy document, investors will gain a valuable perspective by reviewing the information contained therein.

Not only should new investors who are trying to understand a business examine the document, but current investors already familiar with the business should also review it to analyze any changes to the information reflecting changes in the business and operating environment as these may affect a company’s ability to operate and grow.

Reviewed by JeFreda R. Brown

Southwest Airlines Co. (LUV) has become a staple of travel for consumers within the United States. While many other airlines boast more accommodating features and more lavish upgrades, Southwest Airlines has stuck to a business model of shorter, cheaper flights that cater to consumers looking for quick and painless flight plans.

While Southwest Airlines has become synonymous with airline travel, there are quite a few things that most consumers don’t know about the company. Find out about four things that every consumer should know about Southwest Airlines.

Key Takeaways

• In 1972, Southwest Airlines found itself with only three airplanes and a schedule that required four airplanes, a situation that meant the company needed to implement a quick turnaround in order to make its schedules work.
• Southwest Airlines focuses on operational efficiency and logistics as one of its core differentiators, catering to U.S. consumers who want quick, low-cost flights.
• For the first nine years of its operations, the airline operated as a commuter airline with only three destinations in Texas: Dallas, Houston, and San Antonio.
• Southwest was one of the first airlines to offer consumers a website, an online booking tool, and access to coupons and discounts directly from the airline.
• When Southwest Airlines first launched, it had implemented a love-themed marketing campaign, which then became the origin of its LUV ticker symbol.

1. Southwest’s Efficient Operations Stem From Failure

One of the amazing things about Southwest Airlines is the efficiency of its operations. Known to have a great gate-to-gate turnaround time and consistent on-time logistics, it’s interesting to note that its quick turnaround time was born out of failure.

Back in 1972, when the airline was getting off the ground, it had to sell one of its four Boeing 737s to make payroll and remain in business. In spite of selling a quarter of its aircraft, Southwest remained focused on maintaining its four-aircraft schedule. To handle the demand of a four-aircraft schedule with only three planes, Southwest Airlines implemented a 10-minute turnaround to make the schedule work.

Southwest Airlines keeps that operational efficiency as one of its core differentiators to this day, continuing to implement a quick turnaround so consumers can get from point A to point B as quickly as possible.

2. Southwest Only Had Three Destinations for Its First Nine Years of Operations

While Southwest Airlines can take a consumer all over the U.S. today, this wasn’t always the case. Back in 1966, a group of Texas investors decided to buck the traditional airline industry and provide consumers with a commuter airline option.

The company was started with $500,000 in venture capital. Its founders envisioned it as an airline for Texas commuters between Dallas, Houston, and San Antonio.

Due to the nature of the business model, Southwest Airlines instituted a no-frills approach to flying. Instead of trying to be everywhere at the expense of efficiency, Southwest Airlines instead focused on becoming excellent in the cities it serviced.

As competition and profits grew, Southwest finally made the decision to expand in 1975, growing into the dominant airline consumers know today.

3. Southwest Airlines Has Been a Pioneer of Technology That Helps Consumers

Southwest Airlines is more than a pioneer in commuter-focused airline travel. Southwest was also one of the first airlines to introduce a website as well as an online booking tool.

In 1995, Southwest Airlines launched its first display website, called “Southwest Airlines Home Gate.” While consumers could not yet book flights online through Home Gate, they were able to receive up-to-date information and flight routes. In addition, online users of the Home Gate could receive coupons and discounts for air travel.

In 2000, Southwest Airlines launched a booking tool geared toward corporate travel. This was a great addition to its online functionality and serviced the type of consumer that used Southwest Airlines the most: the corporate commuter. This allowed corporate commuters to receive discounts directly through Southwest Airlines rather than needing to go through corporate discounts.

4. The Background of Southwest’s Ticker Symbol, “LUV”

When Southwest Airlines first launched, it implemented a love potion theme. All flight attendants dressed in love-associated costumes and passed out “love potions” and “love bites,” which later became known as drinks and peanuts.

When Southwest Airlines was listed on the New York Stock Exchange (NYSE), it chose the ticker symbol LUV because of the company’s love potion beginnings.

What Is Southwest Airlines?

Southwest Airlines is a major American airline known for its low-cost fares, free checked bags, and no-frills service. Founded in 1967, it has grown to become the largest domestic airline in the United States

How Did Southwest Airlines Get Its Name?

Southwest Airlines got its name because it initially operated routes within the southwestern United States. The airline’s first flights were between Dallas, Houston, and San Antonio, which fit the “Southwest” theme.

What Makes Southwest Airlines Different From Other Airlines?

Southwest Airlines stands out for its business model focused on low-cost fares, free checked bags, and no change fees. It also operates on a point-to-point route system rather than a hub-and-spoke model, which reduces delays and simplifies operations. Southwest acts more as a low-cost airline provider as opposed to a “higher end service” business model.

The Bottom Line

There’s a lot of things you may not know about Southwest. Southwest owes part of its mission for operational efficiency to its history, and it revolutionized air travel with a fast turnaround time to meet its schedules. Additionally, the airline initially operated as a commuter service in Texas for nine years before expanding.

Fact checked by Ariel Courage
Reviewed by Chip Stapleton

The world’s car manufacturers put another 93.5 million vehicles on the roads in 2023, the last full-year numbers currently available. Most of the nations that produce most of the vehicles showed increased production for the year, from a 12% increase in China and 15% in Japan to just 6% in the U.S.

The top-selling car brand globally as of 2023 were Toyota, at 11.07%, followed by Volkswagen, at 6.41%, and Honda, at 4.18%.

Here we take a closer look at the production numbers from the top six countries in terms of the number of cars manufactured, including China, the U.S., Japan, Germany, India, and South Korea.

Key Takeaways

• Globally, motor vehicle production rose 10% to 93.5 million.
• Global production took a huge hit in 2020 and 2021 due to the COVID-19 pandemic but steadily recovered through the following years.
• China continues to rank as the number one producer of cars by volume..
• Following China, the United States, Japan, Germany, India, and South Korea round out the top six car producers.

1. China

China, the world’s biggest manufacturer overall, leads the world as a producer of cars. The country’s 2023 production totaled more than 30 million vehicles, adding up to more than 30% of all cars and trucks produced globally.

More than 26 million of those vehicles were passenger cars, in addition to 4 million commercial vehicles.

Chinese-made vehicles used to stay in China but the country’s export reach has grown. Their major destinations include European Union countries, despite punitive tariffs on China’s electric vehicles, as well as Central America and South America.

2. U.S.

The United States produced about 10.6 million cars and trucks in 2023, a 6% increase over the previous year.

Unlike other countries, the U.S. is big on trucks: more than 8.8 million of the vehicles produced were classed as commercial vehicles.

Note

In 2024, global sales of electric and plug-in hybrid vehicles grew by 25% to more than 17 million vehicles.

3. Japan

After a precipitous drop in production from 2020-2022 due to the COVID-19 pandemic, Japan produced just under 9 million vehicles in 2023. That’s still down from its pre-COVID total of nearly 9.7 million in 2019.

4. Germany

Top German automakers including Volkswagen AG, BMW AG, and Daimler AG produced approximately 4.1 million vehicles in 2023. This figure represented an 8% increase from the previous year.

5. India

While not well-known in America or Europe as a vehicle manufacturer, India produced 5.8 million of them in 2023. That’s an annual increase of 7%. India’s export markets for vehicles include Saudi Arabia, South Africa, and Mexico.

6. South Korea

Its logos like Hyundai and Kia are well known to American car buyers, but South Korea briefly lost its sixth-place global ranking to Mexico. It made a comeback in 2023, producing more than 4.2 million vehicles compared to Mexico’s total of 4 million.

That represents a 13% boost in South Korea’s numbers.

What Are the World’s Top-Selling Car Brands?

Toyota is the top-selling car manufacturer globally, with 8.57 million vehicles sold in 2023. That’s a market share of 11.18%.

Volkswagen comes in second at 4.97 million vehicles sold, or 6.41% market share.

Honda is in third place at 3.77 million, a market share of 4.87%.

What Are the Most Popular Brands Regionally?

In North America, Ford and Chevrolet vehicles remain popular. In Europe, Volkswagen dominates. In Asia, it’s Toyota and Hyundai.

What Is the Fastest-Growing Car Manufacturer?

The world’s fastest-growing vehicle brand is BYD Auto, up 47.46% year-over-year in 2023. In second place is GAC Group, up 37.27% year over year. Both are Chinese manufacturers.

The Bottom Line

Car manufacturing is a truly global market. Toyota, Volkswagen, and Honda lead the pack in global market share. But some fast-growing manufacturers bear names that few Americans would probably recognize. They include BYD Auto and GAC Group, two Chinese companies.

Reviewed by Caitlin Clarke

Escalation clauses are often used to facilitate the creation of long-term contracts as wages or prices fluctuate over time. In these contract negotiations, the Consumer Price Index (CPI) is one of the most frequently used measurements for applying or triggering an escalation clause.

Key Takeaways

• Escalation clauses frequently facilitate the creation of long-term contracts, and the Consumer Price Index (CPI) is often used as a measurement to apply or trigger an escalation clause.
• Escalation clauses are used in contracts for rental property, labor, insurance, court-ordered support payments, and goods and services. The CPI is also used for escalation in government benefits provided to eligible individuals.
• When implementing an escalation clause modifier such as the CPI, the contract must precisely define how periodic adjustments are made to the contract and the figure that the adjustment is applied to.

Adding an Increase Clause in Contracts with CPI

Typically, sellers are hesitant to lock in a set price on a long-term contract for fear of losing the benefit of possible market appreciation in the value of their goods or services. In addition, changes that may occur over time due to inflation or other economic factors could also create a benefit for the seller to keep pricing changes open.

On the flip side, however, it is often convenient for buyers to be able to secure long-term agreements on pricing, either to ensure a steady supply or to be able to budget for long-term expenditures. To meet in the middle, a solution that is usually agreeable to both parties involves including an escalation clause that periodically adjusts the contract price in accordance with an agreed-upon indicator of market price changes. The CPI is such an indicator; it is widely accepted as providing a reasonably accurate reflection of price changes due to inflation.

Important

The Consumer Price Index (CPI) is useful for both sellers and buyers to agree on incremental changes in negotiating the price for a long-term contract.

What Contracts Have Escalation Clauses with CPI?

Escalation clauses are applied to contracts for rental property, labor, insurance, court-ordered support payments, and a myriad of contracts for goods and services. One well-known economic area in which the CPI is used for escalation includes government benefits provided to eligible individuals.

For example, the CPI provides the basis for the annual cost of living increases for recipients of Social Security benefits. The CPI is not a direct cost of living indicator; it is merely a price survey of a broad basket of consumer staples, but it is still utilized to estimate any cost of living changes.

Considerations in Implementing the CPI

When implementing an escalation clause modifier such as the CPI, the contract must precisely define how periodic adjustments are made to the contract and the figure that the adjustment is applied to.

For example, in a rental contract, the adjustment may be made solely to the base rent amount or may be applied to a larger figure that includes other secondary items such as utilities or maintenance services.

The particular variation of the CPI to be employed must also be specified. In fact, the government computes variations of the CPI for different areas of the country in addition to the standard overall CPI calculation. This standard calculation is known as the Consumer Price Index for All Urban Consumers (CPI-U), which purports to show the average CPI for urban workers in all U.S. cities.

Adjustment Timing and Formula Stipulations

The contract necessarily states how often adjustments are to be made or considered. Escalation adjustments most commonly occur on an annual basis, but they may be applied more or less frequently according to whatever agreement the parties to the contract reach. When using the CPI as an escalation modifier, the different variations of the CPI are not all provided with equal frequency. Indexes for some of the U.S. metropolitan areas are only published by the Bureau of Labor Statistics semiannually and therefore are not appropriate for contract situations in which the parties wish to make inflation-related price adjustments every month.

The specific formula for adjustment is also stated in the contract. Commonly, the price adjustment made is a percentage equal to the percent change of the CPI, but a contract may stipulate using a multiplier that results in a greater or lesser adjustment than the change in the CPI number. Some contracts additionally stipulate a maximum total price increase or guarantee a periodic minimum increase.

What Is a Contract?

A contract is a legally binding agreement between two or more parties that outlines the terms and conditions of a transaction, specifying the obligations that each party must fulfill, essentially creating a mutual relationship with enforceable legal consequences if either party fails to meet their agreed-upon terms.

What Is an Escalation Clause?

An escalation clause is a provision in a contract that allows for an increase in the agreed-upon wages or prices if certain conditions change while the contract is in effect. It is also known as an escalator clause.

What Is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.

The Bottom Line

Escalation clauses are often used to ease the creation of long-term contracts as wages or prices vary over time. In these contract negotiations, the Consumer Price Index (CPI) is one of the most frequently used measurements for applying or triggering an escalation clause.

Advantages of an escalation clause in a contract with the CPI include allowing for automatic wage adjustments for inflation; promoting stability and fairness in the employment relationship, especially during economic fluctuation; and incentivizing employers to maintain productivity by clearly linking economic performance and wage increases.

Disadvantages of an escalation clause in a contract with the CPI include limiting a company’s ability to budget accurately, thus leading to potential unexpected cost hikes based on market fluctuations; and reducing a company’s negotiating power in future wage discussions, as the clause can already state a maximum wage increase upfront.

Reviewed by Samantha Silberstein

Cost of capital is the return that is necessary for a company to invest in a major project like building a plant or factory. To optimize profitability, a company will only invest or expand operations when the projected returns from a project are greater than cost of capital, which includes both debt and equity.

Debt capital is raised by borrowing funds through various channels, such as acquiring loans or credit card financing. On the other hand, equity financing is the act of selling shares of common or preferred stock. The primary way that market risk affects cost of capital is through its effect on cost of equity.

Key Takeaways

• Cost of capital refers to the return required to make a company’s capital investment project worthwhile.
• Cost of capital includes debt financing and equity funding.
• Market risk affects cost of capital through the costs of equity funding.
• Cost of equity is typically viewed through the lens of the capital asset pricing model (CAPM).
• Estimating cost of equity can help companies minimize total cost of capital, while giving investors a sense of whether or not expected returns are enough to compensate for the risk.

Understanding Cost of Capital

A company’s total cost of capital includes both the funds required to pay interest on debt financing and the dividends on equity funding. The cost of equity funding is determined by estimating the average return on investment that could be expected based on returns generated by the wider market. Therefore, because market risk directly affects the cost of equity funding, it also directly affects the total cost of capital.

The cost of equity funding is generally determined using the capital asset pricing model (CAPM). This formula utilizes the total average market return and the beta value of the stock in question to determine the rate of return that stockholders might reasonably expect based on the perceived investment risk. The average market return is estimated using the rate of return generated by a major market index, such as the S&P 500 or the Dow Jones Industrial Average. The market return is further subdivided into the market risk premium and the risk-free rate.

The risk-free rate of return is typically estimated using the rate of return of short-term Treasury bills because these securities have stable values with guaranteed returns backed by the U.S. government. The market risk premium is equal to the market return minus the risk-free rate and reflects the percentage of investment return that can be attributed to stock market volatility.

For example, if the current average rate of return for investments in the S&P 500 is 12% and the guaranteed rate of return on short-term Treasury bonds is 4%, then the market risk premium is 12% – 4%, or 8%.

Computing Cost of Capital with CAPM

The cost of equity capital, as determined by the CAPM method, is equal to the risk-free rate plus the market risk premium multiplied by the beta value of the stock in question. A stock’s beta is a metric that reflects the volatility of a given stock relative to the volatility of the larger market.

A beta value of 1 indicates that the stock in question is equally as volatile as the larger market. If the S&P 500 jumps 15%, for instance, the stock is expected to show similar 15% gains. Beta values between 0 and 1 indicate the stock is less volatile than the market, while values above 1 indicate greater volatility.

Assume a stock has a beta value of 1.2, the Nasdaq generates average returns of 10%, and the guaranteed rate of return on short-term Treasury bonds is 5.5%. The rate of return that can reasonably be expected by investors can be computed using the CAPM:

$begin{aligned} &text{Return} = 5.5$​Return=5.5%+1.2×(10%−5.5%)=10.9%​

Using this method of estimating the cost of equity capital enables businesses to determine the most cost-effective means of raising funds, thereby minimizing the total cost of capital. From the perspective of the investor, the results can help decide whether the expected return justifies investment given the potential risk.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

Fact checked by Vikki Velasquez

Term life and whole life are two of the most common types of life insurance policies—providing a tax-free payout to your loved ones if you die. Term life insurance is simpler and cheaper, and may be suitable if you mainly need income replacement for a specific time, like while you’re raising kids. Whole life insurance provides lifelong coverage and can act like a tax-advantaged retirement savings plan with a guaranteed rate of return. Here’s how to understand the pros, cons, and best uses of each.

Key Takeaways

• Term life insurance provides coverage for a predetermined period (the term) and is more affordable than whole life insurance. It does not accumulate cash value, meaning you can’t withdraw or borrow against the policy while you’re alive.
• Whole life insurance offers lifelong coverage so long as you continue paying your premiums and includes an investment component that grows over time. However, whole life policies are significantly more expensive than term life insurance.
• Term life is ideal if you only need coverage for a finite period, such as while raising children or paying off a mortgage.
• Whole life is better for those who want coverage for life as well as the ability to build retirement wealth and income through the policy’s cash value account.
• Some term life policies offer a conversion option that allows you to switch it to a whole life policy in the future. If you think you might want lifelong coverage eventually, but prefer a lower-cost term life policy for right now, look for a convertible term policy.

Term Life Insurance: Affordable Coverage for a Limited Time

Term life insurance covers you for a set period, like 10, 15, 20, or 30 years. Some insurers may offer terms of up to 40 years. 

The longer your term is, the higher your life insurance premiums will be. If you die during the term, your beneficiaries must file a claim with the insurance company. If the insurer approves it, your beneficiaries will receive a tax-free cash payout, or death benefit. This money can be used for anything, from replacing your income to covering funeral costs to paying off debts like a mortgage or student loans. If you outlive the policy term, the policy expires, and no payout is made.

Benefits of Term Life Insurance

• Affordable premiums: Term life is often significantly cheaper than whole life insurance. In fact, for a 40-year-old man with excellent health, the average term policy costs as little as $27 per month for a 30-year term policy with a $250,000 death benefit, according to quotes gathered by Investopedia. For a woman with a similar age and health profile, it’s $22 per month. These same applicants could potentially pay hundreds of dollars more for a whole life policy with the same amount of coverage.
• Simplicity of coverage: Term life insurance is about as simple as it gets when it comes to insurance. You pay a premium for a term that lasts a set number of years, and if you die during that term, your beneficiaries will be paid a death benefit. There are no additional components or accounts to manage. 
• Coverage flexibility: You can choose a term that corresponds with the length of any debt obligations you might have. For example, if you have a 30-year mortgage, you can opt for a 30-year term policy to ensure your family can pay off the house if you die during the term. 
• Investment flexibility: Term life can free up money for other investments. The savings compared to whole life could go into an individual retirement account (IRA) or your 401(k). While whole life policies with cash value can grow in value over time, your gains might be limited compared to investing in an index fund.

Drawbacks of Term Life Insurance

• No cash value or investment component: Unlike whole life or other types of permanent life insurance policies, term life does not accumulate cash value that you can use for your own retirement income or estate planning needs. If you outlive the policy term, you get nothing back from what you paid to keep it active. You can add a return of premium rider—albeit for a much higher cost—to your term life policy to get some or all of your premiums back at the end of your term.
• Limited coverage duration: Once the policy term ends, so does your life insurance coverage. If you still need life insurance, you can renew the policy or purchase a new one, but remember that this will likely be more expensive due to your older age and the additional health risks associated with it.
• High renewal costs: Term life insurance premiums are fixed for the duration of the term, but if you renew your coverage after your current policy expires, you could face a sharp increase in premiums.

Who Should Consider Term Life Insurance?

Term life insurance is designed to provide a financial safety net to families for specific periods when financial obligations are at their highest—such as while raising children or while paying down a mortgage or other debts that could outlive you should you die during the policy term. For example:

• Young families: If you have young children, a 20- or 30-year term policy ensures they can afford an education and maintain their standard of living until they’re old enough to support themselves.
• Homeowners: If you have a mortgage, a term life insurance policy that extends up until or beyond the mortgage term can help ensure your family can pay off the home if you die before it’s paid off.
• Debt holders: If you have significant personal debts, such as a student loan or credit card debt, the death benefit from a term life insurance policy can help to cover those obligations.

Note

Your loved ones won’t inherit debt unless they’re co-signers, but creditors may make claims against your estate.

Whole Life Insurance: Lifetime Protection With Cash Value

Whole life insurance is a type of permanent life insurance that provides coverage until you die or until you stop paying your premiums. In addition to the payout to your family, it comes with a cash component that grows at a guaranteed rate and that you can access while you’re still alive.

Because whole life insurance comes with cash value and is much more likely to pay out, the cost of coverage is much higher than that of term life insurance. And while you’re free to borrow against or withdraw from your policy’s cash value during your lifetime, doing either comes with potential risks.

Benefits of Whole Life Insurance

• Lifelong protection: Unlike term life, whole life insurance policies do not expire. As long as you make regular premium payments and the policy doesn’t lapse, your beneficiaries will receive a death benefit when you die.
• Cash value feature: The cash value component of whole life insurance grows over time on a tax-deferred basis. You can borrow against the accumulated cash value or withdraw from it, often tax-free, for expenses like college tuition, home repairs, or retirement income.
• Fixed premiums for life: Whole life insurance features a level premium, meaning your premiums are fixed for the duration of the policy. And since the coverage lasts as long as you live (or stop paying premiums), you don’t need to worry about renewing it for potentially higher costs as you would with a term policy.
• Tax advantages: The cash value part of whole life policies grows on a tax-deferred basis. If you decide to take out loans or withdraw against the death benefit, those are also generally tax-free unless the amount is more than you’ve paid in premiums. The death benefit is also tax-free for your beneficiaries.

Drawbacks of Whole Life Insurance

• Higher premiums: Whole life insurance is significantly more expensive than term life insurance. A $500,000 whole life policy for a 35-year-old man can cost more than $500 per month.
• Coverage complexity: For those who are less familiar with how life insurance and financial planning work, a whole life policy’s cash value, dividends, and policy loan components can be challenging to understand and manage. 
• Low rate of return: You may gain more by purchasing an affordable term life policy and depositing the difference into your emergency fund or a self-funded investment or retirement account.
• Surrender charges for early cancellation: If you decide to cancel your whole life policy within the first 10 to 15 years that it’s in force, your insurance company may hit you with surrender charges that can reduce any accompanying cash value you receive after terminating the policy. You’ll also be taxed on the cash you receive from surrendering the policy.

Who Should Consider Whole Life Insurance?

Whole life insurance may be a good option if you want lifelong income protection for your beneficiaries and the flexibility to tap into the accumulated cash value while you’re still alive. Overall, whole life insurance is best for the following demographics or circumstances:

• High-net-worth individuals: If you own a significant amount in assets, whole life insurance can provide a tax-free way to transfer it to your heirs when you die. It could also offer another way to save for retirement if you’ve maxed out your 401(k).
• Parents of disabled children: If you have a dependent with disabilities who requires lifelong financial support and in-person care, a whole life insurance policy can provide a financial safety net to ensure their needs are met long after you’re gone.
• Small business owners: If you own a small business, whole life insurance can help with succession planning. The payout can allow your partners to buy your shares as part of a buy-sell agreement. It can also help cover estate taxes and other transition costs, ensuring the business continues without you.

Which Policy Is Right for You?

To determine whether a term life or whole life policy is best for you and your circumstances, consider the following.

Your Budget

Your budget is one of the most significant factors when choosing between term and whole life insurance. Term life insurance is much more affordable, making it a better choice for those who need coverage but have limited funds. Whole life insurance is more expensive but provides you with coverage until you die and a cash value component that can serve as a financial tool.

Your Long-Term Financial Goals

Your long-term financial goals should also play a role in your decision. If you’re just looking for a simple, affordable way to protect your family during a specific period, term life insurance may be the best choice. However, if you want to build cash value over time and have lifelong coverage, whole life insurance may be more appropriate. 

Your Retirement Planning Needs

The cash value component of whole life insurance can also supplement your retirement savings. While not a replacement for a 401(k) or IRA, the cash value from a whole life policy can provide you with additional tax-deferred retirement income. If you’ve already maxed out your IRA or 401(k) contributions and have more money you’d like to allocate toward retirement, a whole life policy could add a much-needed layer of stability and diversification to your portfolio.

Converting Term to Whole Life Insurance: Is It the Right Move?

If you find the affordability of term life insurance appealing but want the flexibility to convert it to permanent coverage as your life or financial circumstances change, you may want to consider a convertible term life insurance policy. 

A convertible term policy lets you convert your term life insurance into a whole life policy without undergoing a medical exam. This can be beneficial if your financial situation changes or you develop health issues down the line that make it more challenging to be approved for a new term or whole life policy.

Benefits of Term Life Conversion

• Coverage flexibility: You can start with cheaper coverage and transition to permanent coverage later. This is helpful if you expect your income to rise or worry about future health problems making it hard to get insurance.
• No medical exam: When you convert your term life policy to whole life, you typically do not need a new health evaluation or medical exam, which can be a crucial win if your health declines.
• Premiums are locked in: Whole life policies have fixed premiums, so converting early may help you secure a more favorable rate.

Drawbacks of Term Life Conversion

• Potentially higher costs: Whole life insurance is significantly more expensive than term. So while the no-medical-exam feature of a conversion policy may guarantee you’ll be approved at a predetermined rate if you convert to a whole life policy, the rate you end up with will still be significantly higher than if you renewed or purchased a new term policy.
• Limited conversion period: Many policies have conversion deadlines, so you’ll need to decide ahead of time whether to convert to a permanent policy.

Who Should Consider a Term to Permanent Life Conversion?

• People with changing financial situations: If your financial outlook has improved and you can afford higher premiums, converting to whole life may be a good option.
• Those with current or future health concerns: If your health is declining or your family has a history of health issues, a convertible term policy can help you maintain coverage without taking a new medical exam.
• Families with potential long-term care needs: If your family requires lifelong financial support but you can’t afford whole life insurance right now, a convertible term policy gives you time. When you can afford it, you can switch to whole life, ensuring your family’s long-term needs are met.

The Bottom Line

Both term and whole life insurance offer a safety net for your family, but they work in different ways. Term life is an affordable option for temporary coverage, while whole life provides lifelong protection and builds cash value, but at a higher cost. The best choice depends on your financial goals, budget, and long-term needs.

Reviewed by JeFreda R. Brown

Why is the price of a company’s shares high one day and lower the next? Share prices move up and down all the time during trading sessions. But a major change in price can be due to a stock split.

Public companies may opt to use stock splits at one point or another, thereby increasing the number of shares outstanding and decreasing the share price.

By doing so, a company can keep its shares in a price range that doesn’t look too expensive to investors.

Key Takeaways

• A stock split increases the number of shares outstanding and reduces share price.
• It doesn’t change the value of an investor’s holding of shares.
• Companies announce stock splits when they believe the high price of their stock is making it inaccessible to many investors.
• Investors may become more interested in buying the stock after a split, which, in turn, can push up the share price.
• Berkshire Hathaway’s Class A stock was priced at more than $753,000 per share on Feb. 27, 2025 but Warren Buffett has no plans for a split.

What Is a Stock Split?

A stock split is an action announced by a corporate board that issues new shares of the company’s stock to existing shareholders. At the same time, the value of a share is adjusted downward proportionately.

That means that the value of the shares held by an investor remains the same as it was before the split.

So, say an investor owns 30 shares of company stock at $50 per share, for a total value of $1,500. The company announces a 2-for-1 split.

It will present the investor with two new shares for every one that they own. And the company will adjust the price of a share down to $25.

As a result, the investor will own 60 shares at $25 per share. The total value is still $1,500.

Reasons for a Stock Split

A company may decide on a stock split for various reasons:

• A high share price may cause investors to avoid the stock because it’s unaffordable or because they perceive that it can’t appreciate much more.
• Lower priced shares attract more investors, which can push up share value.
• News of a stock split can boost media attention and, in turn, demand for the stock.
• Stock splits can indicate a company’s confidence in its growth prospects.

Stock Split Example

Microsoft

A tenacious growth stock since its inception, software giant Microsoft (MSFT) provides a prime example of consistent stock splitting used to maintain an attractive trading range.

From 1987 to 2003, Microsoft split nine times in 2-for-1 and 3-for-2 splits.

Each time the stock split, the share price was lowered, and the number of shares outstanding increased. As of the last split, one original share was equivalent to 288 shares.

If you bought 100 shares at $115.20 per share on Sep. 11, 1987, before the first split occurred, the original value of your holdings would have been $11,520. After all the splits, you’d own 28,800 shares with a value of $11,470,462.78.

On Feb. 27, 2025, a share of Microsoft traded above $398.

Berkshire Hathaway

Some companies don’t use stock splits. Investor Warren Buffett’s holding company, Berkshire Hathaway, is a prominent example.

Since Buffett came to control the firm, its Class A stock has never split, even as the price-per-share has grown incredibly since the 1960s.

Berkshire Hathaway’s stock was already trading at more than $8,000 a share by the late 1980s. On Feb. 27, 2025, Berkshire Hathaway Class A (BRK.A) shares traded at more than $756,570 per share.

Note

While Berkshire Hathaway has never split its Class A stock, in 2010, it split its newer Class B stock 50-for-1 when it acquired Burlington Northern. On Feb. 27, 2025, BRK.B traded at more than $503.25 per share.

How Do You Know if a Stock Is Going to Split?

The company whose shares you own will announce a stock split and you may hear about it through its reporting, by an SEC filing, or when you watch the financial news. You may find out about it after the fact, when you notice that your account shows an unexpected number of additional shares.

Do Stock Prices Go Up After a Split?

Sometimes they do, if the news of a split attracts fresh investor attention and demand. But a rise in price isn’t guaranteed.

Does a 2-for-1 Stock Split Double Your Money?

No. A stock split increases the number of shares that existing shareholders own. But it also adjusts the share price downward to account for the additional shares. So if you owned 10 shares at $100 per share before the split, you’d own 20 shares at $50 after it.

The Bottom Line

The share price of common stocks can be higher on one day compared to the next for a number of reasons, such as market volatility, industry or economic news, regulatory changes, and more.

But a big difference in share price could be due to a stock split, which results in existing shareholders receiving additional shares with a new lower value.