Investing

Fact checked by Yarilet Perez
Reviewed by Natalya Yashina

Balance of Payments Overview

A country’s balance of payments (BOP) is the record of all international transactions (payments and receipts) between the individuals and entities (including government) of that nation and other countries during a specific time period.

The current account, the capital account, and the financial account make up a country’s BOP. Together, these three accounts tell a story about a country’s economy, economic outlook, and strategies for achieving its desired goals.

For example, a large volume of imports and exports may indicate an open economy that supports free trade.

On the other hand, a country that shows little international activity in its capital or financial account may have an underdeveloped capital market and little foreign currency entering the country in the form of foreign direct investment (FDI).

Current, Capital, and Financial Accounts

A current account records the flow of goods and services in and out of a country, including tangible goods, service fees, tourism receipts, and money sent directly to other countries either as official aid or family to family funds.

The capital account measures the capital transfers between U.S. residents and foreign residents.

A financial account measures the increase or decrease in a country’s ownership of international assets.

In this article, we focus on the capital and financial accounts, which reflect investment and capital market regulations within a given country.

Key Takeaways

• A country’s balance of payments is represented by its current account, capital account, and financial account.
• The current account records the flow of goods and services in and out of a country (imports and exports).
• The capital account measures the capital transfers between U.S. residents and foreign residents.
• The financial account reflects increases or decreases in a country’s ownership of international assets.
• Positive capital and financial accounts mean a country has more debits than credits and is a net debtor to the world; negative capital and financial accounts make the country a net creditor. 

The Capital Account

A country’s capital account records all international capital transfers. The income and expenditures are measured by the inflow and outflow of funds in the form of investments and loans.

A deficit shows that more money is flowing out, while a surplus indicates that more money is flowing in.

Along with non-financial and non-produced asset transactions, the capital account includes:

• Dealings such as debt forgiveness
• The transfer of goods and financial assets by migrants leaving or entering a country
• The transfer of ownership of fixed assets and of funds received for the sale or acquisition of fixed assets
• Gift and inheritance taxes
• Death levies, patents, copyrights, royalties
• Uninsured damage to fixed assets

Complex transactions involving both capital assets and financial claims may be recorded in both the capital and current accounts.

The Financial Account

Sub-Accounts and Their Effects

A country’s financial account can be broken down into two sub-accounts. One is the domestic ownership of foreign assets. The other is the foreign ownership of domestic assets. Together, these two sub-accounts measure a country’s ownership of international assets.

If the sub-account for the domestic ownership of foreign assets increases, the overall financial account increases.

If the sub-account for the foreign ownership of domestic assets increases, the overall financial account decreases.

Thus, the overall financial account increases when the foreign ownership of domestic assets sub-account decreases.

Together, these two sub-accounts of the financial account measure a country’s ownership of international assets.

The financial account deals with money related to:

• Foreign reserves
• Private investments in businesses, real estate, bonds, and stocks
• Government-owned assets such as special drawing rights at the International Monetary Fund (IMF)
• Private sector assets held in other countries
• Local assets held by foreigners (government and private)
• Foreign direct investment

How the Capital and Financial Accounts Work

Capital transferred out of a country for the purpose of investing in a foreign country is recorded as a debit in either of these two accounts.

Specifically, if it’s a portfolio investment, it’s recorded as a debit in the financial account. If it’s a direct investment, it’s recorded as a debit in the capital account.

Since these transfers involve investments, there’s an implied return. In the BOP, this return is recorded as a credit in the current account.

The opposite is true when a foreign country earns a return. Paying a return on an investment would be noted as a debit in the current account.

Important

The U.S. Bureau of Economic Analysis records and provides information to the public about the current account, capital account, and financial account balances.

Understanding the Balance of Payments

Accounts in Balance

Unlike the current account, which theoretically is expected to run at a surplus or deficit, the BOP should be zero. Thus, the current account on one side and the capital and financial account on the other should balance each other out.

For example, if a Greenland national buys a jacket from a Canadian company, then Greenland gains a jacket while Canada gains the equivalent amount of currency. To reach zero, a balancing item is added to the ledger to reflect the value exchange.

According to the IMF’s Balance of Payments Manual, the balance of payment formula, or identity, is summarized as:

Current Account + Financial Account + Capital Account + Balancing Item = 0

Positive Capital and Financial Accounts

However, when an economy has positive capital and financial accounts it has a net financial inflow. The country’s debits are more than its credits due to an increase in liabilities to other economies or a reduction of claims in other countries.

This is usually in parallel with a current account deficit—an inflow of money means the return on an investment is a debit on the current account.

Thus, the economy is using world savings to meet its local investment and consumption demands. It is a net debtor to the rest of the world.

Negative Capital and Financial Accounts

If the capital and financial accounts are negative, the country has a net financial outflow. It has more claims than it does liabilities, either because of an increase in claims by the economy abroad or a reduction in liabilities from foreign economies.

The current account should be recording a surplus at this stage. That indicates the economy is a net creditor, providing funds to the world.

Liberal Accounts

The capital and financial accounts are intertwined because they both record international capital flows. In today’s global economy, the unrestricted movement of capital is fundamental to ensuring world trade and eventually, greater prosperity for all.

For this flow to happen, countries must have open or liberal capital account and financial account policies.

Today, many developing economies implement capital account liberalization as part of their economic reform programs. This removes restrictions on capital movement.

Note

Liberalization of a country’s capital account may signal a shift toward more open economic policy.

Benefits of Foreign Direct Investment

This unrestricted movement of capital means governments, corporations, and individuals are free to invest capital in other countries. That can pave the way for not only more FDI in industries and development projects. It can also allow for more portfolio investment in the capital market as well.

Thus, companies striving for bigger markets, and smaller markets seeking more capital and the achievement of domestic economic goals, can expand into the international arena. This can result in a stronger global economy.

The benefits that the recipient country reaps from FDI include an inflow of foreign capital into its country as well as the sharing of technical and managerial expertise. The benefit for a company making an FDI is expanding market share in a foreign economy and, potentially, greater returns.

Another benefit, according to some, is that a country’s domestic political and macroeconomic policies can take on a more progressive stance.

That’s because foreign companies investing in a local economy have a valued stake in the local economy’s reform process. These foreign companies can become expert consultants to the local government on policies that will facilitate businesses.

Other Benefits

Portfolio foreign investments can encourage capital market deregulation and boost stock exchange volume. By investing in more than one market, investors are able to diversify their portfolio risk. They can potentially increase their returns by investing in an emerging market.

A deepening capital market based on local economic reforms and a liberalization of the capital and financial accounts can speed up the development of an emerging market.

Capital Account Control Can Be Good

Some sound economic theories assert that a certain amount of capital account control can be good.

Example

Recall the Asian financial crisis in 1997. Some Asian countries opened up their economies to the world. An unprecedented amount of foreign capital crossed their borders.

Primarily, it was portfolio investment—a financial account credit and a current account debit. This meant short-term investments that were easy to liquidate.

When speculation increased, panic spread throughout the region. Capital flows reversed. Money was pulled out of these capital markets. Asian economies were responsible for their short-term liabilities (debits in the current account) as securities were sold off before capital gains could be reaped.

Not only did stock market activity suffer, but foreign reserves were depleted, local currencies depreciated, and financial crises resulted.

Analysts argue that the financial disaster could have been less severe had there had been some capital account controls.

For instance, had the amount of foreign borrowing been limited (debits in the current account), that would have limited short-term obligations. In turn, some degree of economic damage could have been prevented.

What Does the Balance of Payments Mean?

The term “balance of payments” refers to all the international transactions made between the people, businesses, and government of one country and any of the other countries in the world. The accounts in which these transactions are recorded are called the current account, the capital account, and the financial account.

Why Should an Economy Be Liberalized?

A more open or liberal economy can mean more international trade for a country. The income that results from that trade can benefit a country’s citizens. It could raise their standard of living. For a country as a whole, freer trade can raise its standing in the world and attract investors. That can open up all kinds of beneficial financial and economic opportunities.

What Is the Capital Account?

The capital account is one of the accounts used in the balance of payments. It’s used to record international transfers of capital between the residents in one country and those in other countries. The capital account can reflect a country’s financial health and stability. It can indicate how attractive a country is to other countries that seek to invest internationally.

The Bottom Line

A country’s balance of payments is a summarized record of that country’s international transactions with the rest of the world. These transactions are categorized by the current account, the capital account, and the financial account.

Lessons from the Asian financial crisis resulted in new debates about the best way to liberalize capital and financial accounts.

Indeed, the IMF and World Trade Organization historically have supported free trade in goods and services (current account liberalization). They are now faced with the complexities of capital freedom.

Experience has proven that without controls, a sudden reversal of capital flows can destroy an economy and result in increased poverty for a nation.

Fact checked by Vikki Velasquez
Reviewed by Erika Rasure

The major types of 401(k) plans are traditional 401(k)s and Roth 401(k)s. Smaller employers may offer you a SIMPLE (Savings Incentive Match Plan for Employees) 401(k) or a safe harbor 401(k) plan. If you’re an entrepreneur, you may be able to set up your own 401(k) account, too. These types of 401(k) plans have grown in popularity since the introduction of the 401(k) plan in the late 1970s and early ’80s. Nowadays, about 70 million workers participate in this type of retirement savings account. Learn more about these types of plans to decide which is right for you.

Key Takeaways

• Larger employers typically offer both traditional and Roth 401(k)s.
• Smaller employers may favor SIMPLE (Savings Incentive Match Plan for Employees) and safe harbor 401(k) plans, which can be less complex and less costly to administer.
• Solo entrepreneurs can set up a 401(k) just for themselves.

5 Types of 401(k)s and How They Work

All 401(k)s are defined contribution plans. They’re funded by employee contributions. Sometimes employers contribute, too.

With a 401(k), the amount of money that employees will have available for retirement is determined by how much they contributed to the plan and how well the investments in their account have performed over the years.

There are several different types of 401(k) plans. These are the ones you are most likely to encounter as either an employee or an employer. 

Traditional 401(k)

This is what most people probably think of as a 401(k). The employee contributes pre-tax money to their account each pay period, usually through regular payroll deductions. That money goes into the investments, typically mutual funds, that they’ve chosen from the plan’s offerings.

The maximum that employees can contribute is set by law. For 2025, it is $23,500 a year for anyone under age 50 or $31,000 for those 50 or older—unless you’re 60, 61, 62 or 63. In that case, you can contribute up to $34,750.

On top of that, many employers will make a matching contribution, such as 50 cents per dollar of the employee’s contributions, up to 6% of the employee’s salary.

With a traditional 401(k), the money that the employee contributes is not immediately taxed. Instead, the amount of their contribution lowers their taxable income for the year. So, for example, an employee who makes $50,000 a year and contributes $10,000 to their 401(k) plan will pay income taxes only on $40,000 of their income that year. The account’s earnings will also grow tax-deferred until they’re eventually withdrawn.

When the employee makes withdrawals (often referred to as distributions) from the account, that money will be taxed as regular income. In addition, because 401(k)s are intended for retirement, employees generally can’t withdraw money before age 59½ without paying a 10% early withdrawal penalty. There are, however, some exceptions to that rule.

Traditional 401(k) plans are also subject to required minimum distribution (RMD) rules. Account owners must take RMDs each year starting at age 73. (Your birth year may mean that your RMDs started earlier. Internal Revenue Service (IRS) Publication 590-B has tables and worksheets that you can use to calculate your RMDs.) 

Note

In addition to 401(k)s, other types of defined contribution retirement plans include 403(b) plans for schools and nonprofits, 457 plans for government workers, and profit-sharing plans in the corporate world.

Roth 401(k)

The Roth 401(k), sometimes called a designated Roth account, is like a traditional 401(k) but with one key difference: Contributions don’t receive an upfront tax break, but withdrawals will be tax free if the employee meets certain requirements. Specifically, they must generally be 59½ or older and have had the Roth account for at least five years; however, as with traditional 401(k)s, there are exceptions. Contributions to a Roth 401(k)—as opposed to the account’s earnings—can be withdrawn tax free at any time because they have already been taxed.

Some employers offer both traditional and Roth 401(k) options. Employees can, if they wish, split their contributions between the two types, but their maximum total contribution (in 2025) can’t exceed $23,500 a year for anyone under age 50 or $31,000 for those 50 or older—unless you’re age 60, 61, 62 or 63. In that case, you can contribute up to $34,750.

Roth 401(k)s were subject to the same RMD rules as traditional 401(k)s before 2024. Now, RMDs are no longer required from designated Roth 401(k)s during the account owner’s lifetime, per the SECURE 2.0 Act of 2022.

SIMPLE 401(k)

SIMPLE (Savings Incentive Match Plan for Employees) 401(k) plans are designed for businesses with 100 or fewer employees.

With a SIMPLE 401(k) plan, employees can contribute up to $16,500 (in 2025) if they’re under age 50 or $20,000 if they’re 50 or older. The exception is if you’re age 60, 61, 62 or 63. In that case, you can contribute up to $21,750. As with a traditional 401(k), that money isn’t taxed as income until it’s eventually withdrawn from the plan.

The employer must make either a matching contribution of up to 3% of each employee’s pay for those who contribute to the plan or a nonelective contribution of 2% for all eligible employees, regardless of whether they participate in the plan.

Like traditional and Roth 401(k)s, SIMPLE 401(k)s can be subject to early withdrawal penalties before age 59½ and to required minimum distributions after age 73.

Safe Harbor 401(k)

Safe harbor is a legal term for a provision in the law that exempts a person or company from certain regulations if they meet other requirements. A safe harbor 401(k) allows employers to skip the nondiscrimination tests that most 401(k) plans are subject to. Nondiscrimination tests are intended to ensure that plans do not discriminate in favor of highly-compensated employees in terms of employer matches or other benefits. Because safe harbor 401(k)s are easier to administer, they are especially popular with small businesses.

In return, employers with safe harbor 401(k)s must make annual contributions to every eligible employee’s plan, regardless of whether the employees themselves contribute. In addition, that money is immediately vested, regardless of how long the employee has been with the
company.

(Other types of 401(k) plans often have vesting requirements for their employer contributions, while employee contributions are always immediately vested.)

Employers can make their required contributions in one of three ways:

1. Nonelective contribution: The employer contributes an amount equal to 3% of compensation on behalf of each non-highly compensated employee. Employees are not required to contribute.
2. Basic match: The employer matches 100% of each non-highly compensated employee’s elective contributions, up to 3% of their compensation. Also, it matches 50% of the next 2% in compensation. So, for example, an employee who earns $50,000 a year would be eligible for a maximum match of $2,000 (100% of their first $1,500 in contributions plus 50% of the next $1,000).
3. Enhanced match: The employer can base its match on up to 6% of the employee’s compensation, rather than just 5%, as with a basic match.

Aside from those differences, safe harbor 401(k)s work much like any other 401(k) and are subject to the same rules on contributions, early withdrawals, and required minimum distributions.  

Warning

If you have multiple 401(k) plans, such as one with an employer and another for your own small business, your total contributions can’t exceed the maximum for a single 401(k) plan.

One-Participant 401(k) 

These plans go by a variety of names, including solo 401(k), individual 401(k), and self-employed 401(k). They are designed for businesses with no employees other than the owner, plus their spouse if that person also works in the business.

Because the owner is considered both an employer and an employee of the business, they can contribute to the plan in both capacities.

As employees, they can contribute up to 100% of their compensation or net income from self-employment, with the same annual contribution limit as traditional and Roth 401(k) plans: for 2025, it’s $23,500 a year for anyone under age 50 or $31,000 for those 50 or older. There’s an exception if you’re 60, 61, 62 or 63. If you are, you can contribute up to $34,750.

As their own employers, they can also make additional, nonelective contributions. The maximum depends on how their business is set up for tax purposes (S corporation vs. self-employed sole proprietor, for example).

In total, as employer and employee, the business owner can contribute as much as $70,000 to their 401(k) plan (for 2025), plus another $7,500 if they’re 50 or older (or $11,250 if they’re 60, 61, 62 or 63).

Spouses who earn income from the business can also contribute to a one-participant 401(k), up to the same maximums, and they are eligible for the same additional employer contribution.

One-participant 401(k)s can be either traditional or Roth plans and are subject to the same rules as those plans for early withdrawals and required minimum distributions.

Other Retirement Savings Vehicles

There are also other ways you can save for retirement. Individual retirement accounts (IRAs) offer a traditional option and a Roth option. You can open an IRA on your own with a broker and potentially get a tax deduction for contributing every year.

Additionally, your employer may offer a health savings account (HSA). An HSA is a place where you can save pre-tax money every month and use it for medical expenses. It’s often paired with a high-deductible health plan. It’s a tax-advantaged account that can be used as a retirement savings account. That’s because you can invest the funds in an HSA similar to how you would with a 401(k) or IRA. You can also leave the funds where they are and roll them over year to year if you don’t use them. And when you reach age 65, you can use the money in your HSA for other expenses, not just qualified medical expenses. (If you do so, however, you’ll pay income tax on those expenses.)

Can You Have Both a 401(k) Plan and an Individual Retirement Account (IRA)?

Yes, you can contribute to both a 401(k) plan at work and an individual retirement account (IRA) on your own. However, if either you or your spouse has a 401(k) plan, your traditional IRA contributions may not be tax-deductible. It depends on your tax filing status and income. For example, for married couples who file jointly, the income phase-out range is $126,000 to $146,000 if the spouse who is contributing to the IRA is covered by a workplace retirement plan, like a 401(k). (Roth IRA contributions are not tax-deductible.)

How Does Vesting Work in a 401(k) Plan?

Employee contributions to a 401(k) plan vest immediately, meaning that they belong to the employee from day one. Employer matching contributions can work differently, depending on the type of plan. With some types, such as safe harbor 401(k)s, matching contributions vest right away. With other types, such as traditional 401(k)s, employers can set different rules if they wish to. For example, the employer match might vest only after three years of service or vest gradually over a six-year period. If the employee parts ways with their employer before that period is up, they lose access to those matching contributions.

What Is Automatic Enrollment, and How Does It Work?

Automatic enrollment is a provision in some 401(k) plans that allows employers to defer a portion of an employee’s wages and deposit the money into a 401(k) account on their behalf. Employees can opt out if they wish to do so. Plans with this provision are sometimes referred to as automatic enrollment 401(k)s. Automatic enrollment (with an opt-out provision for those who don’t want to join) is mandatory for newly created 401(k) plans for plan years beginning after December 31, 2024.

Are 401(k) Plans Federally Insured?

No, unlike most bank and credit union accounts in the U.S., 401(k) plans are not covered by the Federal Deposit Insurance Corp. (FDIC).

In addition, the money you save in a 401(k) is invested. Investments are always subject to losses, and gains are never guaranteed.

The Bottom Line

There are several types of 401(k) plans that employers may offer their workers. Traditional and Roth plans are most common among larger employers, while SIMPLE and safe harbor plans are often found at small businesses. Business owners without other employees can also open one-participant 401(k) plans. If you have any questions about your plan, reach out to your employer or plan administrator.

Fact checked by Pete Rathburn
Reviewed by David Kindness

What Are Externalities?

An externality is a cost or benefit related to the production or consumption of a good or service that affects third parties unrelated to the production or consumption. It is generally the unintended, indirect consequence of everyday economic activities. 

Externalities occur when the transactions between two parties affect the existence and well-being of a third. In economics, there are four different types of externalities:

1. Positive consumption
2. Positive production
3. Negative consumption
4. Negative production

As implied by their names, externalities can have positive or negative effects.

Read on to learn how externalities affect equilibrium and market failure.

Key Takeaways

• An externality is a cost or benefit to an unrelated third party that stems from the production or consumption of a good or service.
• Equilibrium is the ideal balance between buyers’ benefits and producers’ costs
• Market failure is the inefficient distribution of goods and services in the market.
• Externalities lead to market failure because a product or service’s price equilibrium does not accurately reflect the true costs and benefits of that product or service.

Understanding Externalities

Externalities, which can be both positive or negative, can affect an individual or single entity, or they can affect society as a whole.

Those impacted by externalities—usually third parties—have no control over them and never choose to incur the costs or benefits.

It is primarily the responsibility of those generating externalities to account for them and manage them as much as possible.

Negative Externalities

Negative externalities usually come at a cost to individuals, while positive externalities generally provide a benefit.

For example, a crematorium releases toxic gases such as mercury and carbon dioxide into the air. This has a negative impact on people who may live in the area, causing them harm.

Pollution is another commonly known negative externality. Corporations and industries may try to curb their costs by using production measures that have a detrimental effect on the environment. While this may decrease the cost of production and increase revenues, it also imposes a cost on the environment and society.

Positive Externalities

Meanwhile, establishing more green spaces in a community brings more benefits to those living there.

Another positive externality is the investment in education. When education is easy to access and affordable, society benefits as a whole. People with an education can command higher wages, while employers have a labor pool that’s knowledgeable and trained.

Governments may choose to remove or reduce negative externalities through taxation and regulation. So, heavy polluters, for example, may be taxed and subject to more scrutiny.

Those who create positive externalities, on the other hand, may be rewarded with subsidies.

Important

Governments that regulate in an attempt to curb negative externalities must be prepared to monitor the producers and to hold those who fail to improve accountable.

Equilibrium and Market Failure

Externalities lead to market failure when a product or service’s price equilibrium does not accurately reflect the true costs and benefits of that product or service.

Equilibrium represents the ideal balance between buyers’ benefits and producers’ costs. It is supposed to result in the optimal level of production.

However, the equilibrium level is flawed when there are significant externalities, which create incentives that drive individual actors to make decisions which end up making the group worse off. This is known as a market failure.

When negative externalities are present, it means the producer does not bear all costs, which results in excess production.

With positive externalities, the buyer alone does not get all the benefits of the good; others benefit, too. This results in decreased production.

Negative Externality Example

Let’s look at a negative externality example of a factory that produces widgets. It pollutes the environment during the production process. The cost of the pollution is not borne by the factory, but is instead imposed upon and shared by society.

If the negative externality were taken into account, then the cost of the widget would be higher. This would result in decreased production and a more efficient price equilibrium.

In this case, though, the market failure was too much production and a price that didn’t match the true cost of production, as well as high levels of pollution.

Positive Externality Example

Now let’s take a a look at the relationship between positive externalities and market failure. Take education. Obviously, the person being educated benefits from and pays for this cost.

However, there are positive externalities beyond the one person being educated. These could be a more intelligent and knowledgeable citizenry, increased tax revenues from better-paying jobs, less crime, and more social stability.

All of these factors positively correlate with education levels. These benefits to society are not accounted for when the consumer considers the benefits of education.

Therefore, education would be under-consumed relative to its equilibrium price level if these benefits are taken into account.

Clearly, public policymakers should look to subsidize markets with positive externalities and punish those with negative externalities.

Note

Market failure occurs when the balance between supply and demand is upset and price equilibrium disappears. It reflects the inefficient allocation of resources.

Obstacles to Overcoming Externalities and Correcting Market Failure

One obstacle for policymakers in their efforts to correct market failures is the difficulty of quantifying externalities to increase or decrease consumption or production.

In the case of pollution, policymakers have tried tools, including mandates, incentives, penalties and taxes, that would result in increased costs of production for companies that pollute.

For education, policymakers have looked to increase consumption with subsidies, access to credit, and public education.

Moreover, in addition to positive and negative externalities, some other reasons for market failure include a lack of public goods, under-provision of goods, overly harsh penalties, and monopolies.

The upshot is that markets are the most efficient way to allocate resources, with the assumption that all costs and benefits are accounted for by prices.

When this is not the case, significant costs are inflicted upon society, as a result of underproduction or overproduction.

Can Markets Correct Externalities?

This is a topic of debate. They sometimes can, especially if the externality is small scale and the parties to the transaction can work out a fix. However, with major externalities, the government usually gets involved due to its ability to make the required impact.

When Do Externalities Happen?

They happen when the costs or benefits of an economic transaction between a producer and a consumer aren’t restricted just to them but indirectly affect other people.

What’s Government’s Role in Affecting Externalities?

A government can curb negative externalities by taking steps to tax the goods and services that are causing costs to affect uninvolved third parties. Conversely, it can support positive externalities by providing subsidies for the goods and services that affect third parties.

The Bottom Line

Being cognizant of externalities is one important step in combating market failure.

While price discovery and resource allocation mechanisms of markets need to be respected, market equilibrium is a balance between costs and benefits to the producer and consumer. It does not take third parties into account.

Thus, it is policymakers’ responsibility to adjust costs and benefits in an optimal way.

Reviewed by Margaret James
Fact checked by Jiwon Ma

What Is Impairment Loss?

Impairment loss occurs when a business asset suffers an unexpected, permanent depreciation in fair market value in excess of the book value of the asset on a company’s financial statements.

Assets can experience this decrease in value for a variety of reasons. These can include changes in market conditions, new government legislation, the enforcement of regulations, new technologies, and more.

Under U.S. generally accepted accounting principles, or GAAP, assets that are considered impaired must be recognized as a loss on an income statement.

Key Takeaways

• Impairment occurs when a business asset suffers a depreciation in fair market value in excess of the book value of the asset on a company’s financial statements.
• If the calculated costs of holding the asset exceed the calculated fair market value, the asset is considered to be impaired.
• Under GAAP, assets considered impaired must be recognized as a loss on an income statement.
• The technical definition of impairment loss is a decrease in net carrying value of an asset greater than the asset’s future undisclosed cash flow.

Understanding Impairment Loss

The technical definition of impairment loss is a decrease in net carrying value, the acquisition cost minus depreciation, of an asset that is greater than the future undisclosed cash flow of the same asset.

Impairment occurs when assets are sold or abandoned because the company no longer expects them to benefit long-run operations.

This is different from a write-down, though impairment losses often result in a tax deferral for the asset.

Depending on the type of asset impaired, stockholders of a publicly held company may also lose equity in their shares. This results in a lower debt-to-equity (D/E) ratio.

Important

Even when impairment results in a small tax benefit for the company, the realization of impairment is bad for the company as a whole. It usually represents the need for reinvestment.

Calculating Impairment Loss

1. The first step is to identify the factors that lead to an asset’s impairment. Some factors may include changes in market conditions, new legislation or regulatory enforcement, turnover in the workforce, or decreased asset functionality due to aging.

In some circumstances, the asset itself may be functioning as well as ever, but new technology or new techniques may cause the fair market value of the asset to drop significantly.

2. A fair market calculation is key; asset impairment cannot be recognized without a good approximation of fair market value. Fair market value is the price that the asset would fetch if it was sold on the market.

This is sometimes described as the future cash flow that the asset would expect to generate in continued business operations. Another term for this value is “recoverable amount.”

3. Once the fair market value is assigned, it is then compared with the carrying value of the asset as represented on the company’s financial statements.

Carrying value does not need to be recalculated at this time since it exists in previous accounting records.

4. If the calculated costs of holding the asset exceed the calculated fair market value, the asset is considered to be impaired.

If the asset in question is going to be disposed of, the costs associated with the disposal must be added back into the net of the future net value less the carrying value.

Impairment losses are either recognized through the cost model or the revaluation model, depending on whether the debited amount was changed through the new, adjusted fair market valuation described above.

What Does Impairment Mean?

In accounting, impairment refers to an unexpected and permanent drop in a fixed or intangible asset’s value to a market value that’s less than what’s recorded on a company’s balance sheet. The amount is recorded as a loss on the income statement.

How Does Impairment Loss Differ from a Write-Down?

A write-down leads to impairment loss. “Write-down” is an accounting term for the reduction in the book value of an asset when its fair market value (FMV) has fallen below the carrying book value, and thus becomes an impaired asset. Impairment loss often results in a tax deferral for the asset.

How Do I Start to Determine Impairment Loss?

Begin by identifying the factors that lead to an asset’s impairment. Factors may include:

• Changes in market conditions
• Decreased asset functionality due to aging
• New legislation or regulatory enforcement
• New technology or new techniques that may cause the asset’s fair market value to drop significantly
• Turnover in the workforce

The Bottom Line

Impairment occurs when a business asset suffers a permanent reduction in fair market value in excess of the book value of the asset on a company’s financial statements.

Under U.S. generally accepted accounting principles (GAAP), assets that are considered impaired must be recognized as a loss on an income statement.

Reviewed by David Kindness

In managerial accounting, the transfer price is the price at which a company’s subsidiary sells goods and services to another. Goods and services can include labor, components, parts used in production, and general consulting services.

Key Takeaways

• Transfer pricing is an accounting practice that records the price one company division charges another division for goods and services.
• Subsidiaries can sell labor, manufacturing parts, and other supplies to each other.
• Transfer prices impact three managerial accounting areas: division performance, managerial incentives, and taxes.

Transfer Price and Managerial Accounting

Transfer prices affect three managerial accounting areas:

• Transfer prices determine costs and revenues among transacting divisions, affecting the performance of each division.
• Transfer prices affect division managers’ incentives to sell goods either internally or externally. If the transfer price is too low, the upstream division may refuse to sell its goods to the downstream division, potentially impairing the company’s profit-maximizing goal.
• Transfer prices are especially important when products are sold across international borders. The transfer prices affect the company’s tax liabilities if different jurisdictions have different tax rates.

Important

Transfer pricing is regulated by Internal Revenue Service (IRS) Section 482, which advises that prices charged by one company affiliate to another, involving the transfer of goods, services, or intangibles, yield results that are consistent with the results that would have been realized if uncontrolled taxpayers make the same transaction.

Determining a Transfer Price

Transfer prices can be determined under the market-based, cost-based, or negotiated method. Under the market-based method, the transfer price is based on the observable market price for similar goods and services. Under the cost-based method, the transfer price is determined based on the production cost plus a markup if the upstream division wishes to earn a profit on internal sales.

Finally, upstream and downstream divisions’ managers can negotiate a transfer price that is mutually beneficial for each division. Transfer prices determine the transacting division’s costs and revenues.

If the transfer price is too low, the upstream division earns a smaller profit, while the downstream division receives goods or services at a lower cost. This affects the performance evaluation of the upstream and downstream divisions in opposite ways. For this reason, many upstream divisions price their goods and services as if they were selling them to an external customer at a market price.

Tax Liability

Transfer prices play a large role in determining the overall organization’s tax liabilities. If the downstream division is located in a jurisdiction with a higher tax rate compared to the upstream division, there is an incentive for the overall organization to make the transfer price as high as possible. This results in a lower overall tax bill for the entire organization.

When Does Transfer Pricing Lead Subsidiaries To Buy From Outside Sources?

If the upstream division manager has a choice of selling goods and services to outside customers and the transfer price is lower than the market price, the upstream division may refuse to fulfill internal orders and deal exclusively with outside parties.

How Does a High Transfer Price Affect Transactions Between Subsidiaries?

A high transfer price may provide the downstream division with the incentive to deal exclusively with external suppliers, and the downstream division may suffer from unused capacity.

How Does Transfer Pricing Affect Multinational Corporations?

The transfer pricing mechanism may help companies shift tax liabilities to low-cost tax jurisdictions. Multinational corporations (MNCs) are allowed to use the transfer pricing method to allocate earnings among their subsidiary and affiliates that are part

of the parent organization. The IRS and the Organization for Economic Cooperation and Development (OECD) oversee international taxable transactions.

The Bottom Line

The transfer price impacts the performance of both subsidiaries that transact with one another. A price that is too low disincentivizes an upstream division from selling to a downstream division, as it results in lower revenues. A price that is too high disincentives the downstream division from buying from the upstream division, as costs are too high. Arriving at a fair transfer price benefits both subsidiaries and allows for favorable tax setups.

Many of my female clients come to me feeling intimidated by investing. It’s understandable—our industry is often filled with men geeking out on complex topics like Sharpe ratios and technical analysis.

While it can seem like men are more financially savvy, research shows women are actually better investors than men. They are more likely to do their research and stick with the plan, less prone to overconfidence, and perform better on both the retail and professional money manager sides.

Here’s how I’m talking to my female clients about getting started on their investing journey with confidence.

Key Takeaways

• Studies show women outperform men by 1.8% annually due to traits like research, discipline, and less overconfidence.
• To build confidence, begin by understanding your current investments, defining asset allocation goals, and selecting appropriate funds with manageable fees.
• Avoid letting fear dictate your actions—set clear objectives and follow through with a consistent investment strategy.

What I’m Telling My Clients

The research shows women are great investors, but starting your investing journey can still feel scary. Here are some simple first steps:

1. Understand what you may already own. Do you have a retirement plan at work, an account you may have set up years ago, or something you own jointly with a spouse or partner? Find out the names of the investments inside those accounts and do a little research on what they are composed of. 
2. Develop a big-picture objective for the asset allocation you want to own. At the broadest level, that means the percentage of stocks vs. bonds.
3. Pick funds inside your accounts that get you to that allocation. While you’re at it, take a peek at the costs and fees of those funds. 
4. Once you have your plan in place, stick to it! Watch out for the temptation to fall prey to fear or think you can predict what the market will do next.

Note

According to a study from the Warwick School of Business, women investors outperformed men at investing by 1.8% each year.

The Bottom Line

Building confidence as a female investor starts with recognizing your own potential. Women have proven to be more disciplined and successful investors than many people realize. Although investing can feel intimidating, taking small, manageable steps—such as assessing your current assets, setting clear goals, and choosing the right funds—can help you begin your journey confidently.

Reviewed by Eric Estevez

You have to look at many different financial records to see if it’s a worthwhile risk when you’re considering investing in a company. What does it mean to you if you invest in a company after doing all your research and then it decides to borrow money?

You can evaluate whether the debt will affect your investment in a few ways.

Key Takeaways

• A company acquires debt when it issues securities.
• A company also acquires debt when it takes out loans from banks and other lending institutions.
• Look into how much debt the company has overall to determine the impact on an investment.
• Try to determine why the debt has been incurred.
• Compare the total to other company debt levels in the same industry.

How Does Corporate Debt Work?

A company can take on different types of debt. It can borrow money by two main methods:

• Issuing fixed-income (debt) securities like bonds, notes, bills, and corporate papers
• Taking out a loan from a bank or another lending institution

Fixed-Income Securities

Debt securities issued by the company are purchased by investors. You’re effectively lending money to a business or government when you buy any type of fixed-income security. The company must pay underwriting fees when issuing these securities but debt securities allow the company to raise more money and to borrow for longer durations than loans typically allow.

Loans

Borrowing from a private entity means going to a bank for a loan or a line of credit. Companies will commonly have open lines of credit from which they can draw to meet their cash requirements for day-to-day activities. The loan a company borrows from an institution can be used to pay the company payrolls, buy inventory and new equipment, or keep it as a safety net. Loans typically require repayment in a shorter period than most fixed-income securities.

What to Look for

An investor should consider a few things when deciding whether to continue their investment in a company that’s taking on new debt.

How Much Debt Does the Company Currently Have?

Taking on some debt if a company has absolutely no debt may be beneficial because it can give it more opportunity to reinvest resources into its operations. You might want to think twice, however, if the company in question already has a substantial amount of debt,

Too much debt is generally a bad thing for companies and shareholders because it inhibits a company’s ability to create a cash surplus.

Important

High debt levels can also negatively affect common stockholders who are last in line for claiming payback from a company that becomes insolvent.

What Kind of Debt Is the Company Taking on?

Loans and fixed-income securities that a company issues differ dramatically in their maturity dates. Some loans must be repaid within a few days of issue but others don’t have to be paid for several years. Debt securities issued to public investors will typically have longer maturities than the loans offered by private institutions and banks.

Large short-term loans may be harder for companies to repay but long-term fixed-income securities with high interest rates might not be easier on the company. Try to determine if the length and interest rate of the debt is suitable for financing the project that the company wants to undertake.

What Is the Debt for?

Is the debt meant to repay or refinance old debts or is it for new projects that have the potential to increase revenues?

You should typically think twice before purchasing stock in companies that have repeatedly refinanced their existing debt. This indicates an inability to meet financial obligations. A company that must consistently refinance may be doing so because it’s spending more than it’s making. Its expenses are exceeding its revenues. This is bad for investors.

One thing to note, however, is that it’s a good idea for companies to refinance their debt to lower their interest rates. This type of refinancing aims to reduce the debt burden but it shouldn’t affect the debt load and isn’t considered to be new debt.

Can the Company Afford the Debt?

Most companies will be sure of their ideas before committing money to them but not all companies succeed in making their ideas work. It’s important to determine whether the company can still make its payments if it gets into trouble or if its projects fail. Look into whether the company’s cash flows are sufficient to meet its debt obligations and make sure the company has diversified its prospects.

What Special Provisions May Force Immediate Payback?

Look to see whether any of its loan provisions might be detrimental to the company if the provision is enacted. Some banks require minimum financial ratio levels so the bank has the right to call or demand repayment of the loan if any of the company’s stated ratios drop below a predetermined level. Being forced to repay the loan unexpectedly can magnify any problem within the company and sometimes even force it into liquidation.

How Does the Company’s New Debt Compare to Its Industry?

Many different fundamental analysis ratios can help you along. These ratios are a good way to compare companies within the same industry:

• Quick Ratio (Acid Test): This tells investors approximately how capable the company is of paying off all its short-term debt without having to sell any inventory.
• Current Ratio: This ratio indicates the amount of a company’s short-term assets versus its short-term liabilities. The greater the short-term assets compared to liabilities, the better off the company is in paying off its short-term debts.
• Debt-To-Equity Ratio: This measures a company’s financial leverage that’s calculated by dividing long-term debt by shareholders’ equity. It indicates what proportions of equity and debt the company is using to finance its assets.

What Are Equity Securities?

Common stock is an equity security. Each share awards partial ownership in the company when it’s sold to an investor. The percentage of ownership depends on the percentage of total shares issued.

What’s the Difference Between Common and Preferred Stock?

Common stock provides an investor with ownership rights. A share typically represents one vote on important issues affecting the company. The shares may increase in value as the company earns a profit.

Preferred stock generally may not provide voting rights but it often pays dividends that are more significant than the returns provided by common stock shares. Price per share doesn’t generally increase, however. Preferred shareholders are generally first in line for payout if the company fails and liquidates, ahead of common shareholders.

How Can I Look Into a Company’s Cash Flows?

The information you need will be available on the company’s cash flow statements. They’re typically issued for each accounting period and they segregate cash flow into operating, investing, and financing activities. These statements are available in the company’s Form 10-K and Form 10-Q filings.

The Bottom Line

A company that’s increasing its debt load should have a plan for repaying it. Try to ensure that the company knows how the debt affects investors, how the debt will be repaid, and how long it will take to do so when you have to evaluate a company’s debt.

Reviewed by Margaret James

What Is a Back Door Listing?

A back door listing provides a way for a private company to go public if it doesn’t meet the requirements to list on a stock exchange. The company gets on the exchange by going through a back door. This process is sometimes referred to as a reverse takeover, reverse merger, or reverse IPO.

Key Takeaways

• A back door listing is a way for a private company to go public if it doesn’t meet the requirements to list on a stock exchange.
• One company will acquire another or create a shell corporation that allows the two companies to continue operations independently of each other.
• A private company will sometimes engage in a back door listing simply to avoid the time and expense of engaging in an IPO.
• Shareholders in the target company may get some cash for the deal.
• A back door listing can hurt profits if the two companies don’t have a natural fit.

How Does a Back Door Listing Work?

A private company avoids the public offering process and gains automatic inclusion on a stock exchange by going through a back door listing. The buyer may merge both companies’ operations following the acquisition or create a shell corporation that allows the two companies to continue operations independently of each other.

A private company will sometimes engage in a back door listing simply to avoid the time and expense of engaging in an IPO although this isn’t as prevalent.

Benefits of Back Door Listings

One of the major upsides of going through a back door listing is that it’s a cost-effective way for a private firm to go public. It doesn’t have to go through the expense of regulatory filings or funding to go public because it can strike up a deal with an already public company.

Private firms may also inject life into a troubled company without the need to raise more money from the market. Not only does this bring a new set of people to the table but it may also bring new technology, products, and marketing ideas.

There’s also an upside for existing stock owners. Shareholders in the target company may also get some cash for the deal. It may mean added value for the new entity’s shareholders as well if the merger is successful and the two companies’ synergy is compatible.

Downsides of Back Door Listings

There are also disadvantages to undergoing a back door listing as with any other process. It doesn’t happen very often so it may be cumbersome to explain to shareholders, leaving them confused and upset.

The process can also lead to new shares being issued for the incoming private company. This leads to share dilution that can decrease existing shareholders’ ownership and value in the company.

A back door listing might help boost a failing public company’s bottom line but it can have the reverse effect as well. It may hurt profits in the end if the two companies don’t have a natural fit.

Important

Trading of the listed company can be halted or suspended until the merger is fully executed depending on which country the listing is located in.

Example of a Back Door Listing

Say a small private firm wants to go public but it just doesn’t have the resources to do so. It may decide to buy out an already publicly traded company to meet the requirements. The company would need a lot of cash on hand to make this possible.

Let’s take a hypothetical example of two companies, Company A and Company B. Company A, the private company, buys control of Company B through its shareholders. Company A’s shareholders will then control Company B’s Board of Directors. 

The merger is negotiated and executed when the transaction is complete. Company B will then issue a majority of its shares to Company A and Company A will then begin to do business under Company B’s name and merge the operations of both. Company A may open up a shell corporation and keep the two operations separate in some cases.

What Is a Real Life Example of a Back Door Listing?

One of the more significant examples of a back door listing occurred when the New York Stock Exchange (NYSE) acquired Archipelago Holdings. The two agreed to a nearly $10 billion deal and created the NYSE Group in 2006. Archipelago was one of the exchange’s main competitors even though it offered trading services electronically compared to the open outcry system of the NYSE.

What Is a Shell Corporation?

A shell corporation has no employees and it offers no products or services. It effectively exists in name only.

What’s the Effect of Share Dilution?

Share dilution occurs whenever a company issues additional shares of its stock. The result is that there are more shares outstanding but the overall value of all shares remains the same. Each share outstanding therefore becomes worth less as a result because more shares have a piece of the pie.

The Bottom Line

A back door listing is literally what the name implies: Someone or something is entering through other than the main entrance. It happens in trading when a private company can’t go public because it doesn’t meet stock exchange requirements or if it doesn’t want to go public. It often involves a merger between a public company and a private company.

Whether it provides a worthwhile investment for traders depends on several factors. Do some thorough research into the situation if you’re considering it.

Reviewed by Ebony Howard

The electronics and Nintendo game systems you have lying around the house could be worth major dollars. Why leave them in drawers when you could turn them into cold, hard cash? It’s easier than you think.

Here’s how to find out how much your used Nintendo might be worth.

Key Takeaways

• Your used Nintendo game systems and other electronics could be worth money by reselling them.
• You could go the store route, either brick-and-mortar or online, via retailers such as GameStop, Amazon, or Best Buy.
• You have other options with less well-known retailers, such as Decluttr and Swappa.
• You could also try Craigslist or a Facebook garage sale group, as well as community for-sale sites and old-fashioned newspaper classified advertising. There are safety concerns with meeting a stranger, as well as the risk of fraud, but you may be able to get a higher price.

Staggering Facts

Recycling statistics reveal that Americans throw away 8 million tons of electronic equipment each year, and 75 pounds of gold and 772 pounds of silver for every one million discarded cellphones. But we’re not talking about recycling; we’re talking about reselling. Even that old iPhone 4S that you bought new in 2010 could still land you around $10, and newer phones might get you $350 or more. The average home has about 24 electronic products; that represents a lot of money on the used goods market.

How Do I Sell My Used Nintendo?

There are plenty of ways to sell your used electronics. First, you could go the retail route. If you want to sell that old video game console, take it to your local GameStop (GME). Once you sell your console, it goes through a host of tests, and if anything is broken, it gets repaired. Next, it’s wiped clean of any identifying data and then sold as a used product.

Amazon Inc. (AMZN) has a trade-in program. Send your used items to the Amazon warehouse after settling on a price, and you’ll get a gift card for the agreed-upon amount. The drawback is that you don’t pocket the money; you have to spend it at Amazon. On the other hand, it’s easy and you don’t have to meet up with an unsavory character in a parking lot to sell locally.

Best Buy Co. Inc. (BBY) has a similar program in which it offers a gift card in exchange for the trade-in. You can take your eligible device to your local Best Buy or mail it.

Once you get outside of well-known retailers, you have more options in terms of how you collect your money.

Example of How Much Your Used Nintendo Is Worth

Where will you get the best deal? Let’s imagine that you have a used Nintendo Switch OLED Console in good condition. Here’s what the major players offer:

• Decluttr: $54
• Best Buy: Up to $90, for any of three varieties of the console
• GameStop: $143 to $154, depending on the console
• Swappa: $128 to $288

Go Direct

But what if you want to sell your used electronics without the help of one of these platforms? You could try Craigslist, but as we said above, you have to be careful when meeting a stranger. There are safety concerns, but if you’re OK with that, you may be able to get a higher price.

In most communities, there are Facebook garage sale groups where people put their goods up for sale. Much like Craigslist, it will probably involve face-to-face contact, but the prices are likely similar to Craigslist. Then there are all of the community for-sale sites, as well as the good old-fashioned newspaper.

Beware of fraud when you opt for Craigslist and other community classifieds; these things work best when you sell local and make a physical exchange or receive payment before shipping. If you want to open it up to a national market, it’s still best to go through one of the intermediaries. Many people have found ways to defraud sellers out of their products and money.

What Is Nintendo?

Nintendo is a Japanese company that develops, manufactures, and sells video game consoles and software, as well as other home entertainment products. It is one of the world’s largest video game companies.

What Kinds of Used Consumer Electronics Can I Sell?

You can sell many types of used consumer electronics, including:

• Cellphones
• Computers
• DVDs and Blu-rays
• Kindles and other e-readers
• Laptops
• Tablets
• Video games
• Video game consoles
• Wearable technology

What Is the Risk of Selling Your Old Phone?

The risk of selling your old cellphone is that it might be running on an outdated version of Android or iOS. This means that it often doesn’t have critical security updates to keep the buyer and their data safe, although the hardware is usually fine to keep using.

The Bottom Line

Today, the stigma associated with buying used electronics is gone for many consumers who are trying to save money. Plus, the overseas market is huge. This means that the prices people are willing to pay for your used electronics are higher than you think.

Go through your drawers, find that old stuff, and see what kind of market exists; even if your device is broken, you can get paid for it. And remember, the sooner you get it on the market, the better. The older the device, the less you get.

Whether it’s Tiffany or Costco, here’s what you need to know

Reviewed by Margaret James

Costco may not be the first store that comes to mind when you think about shopping for a diamond ring. But the sparkly jewelry case often positioned near the wholesale club store entrance is enough to make many shoppers curious about the wisdom of buying fine jewelry there.

Here are some things you should know before you buy a diamond ring from Costco (COST)—or anywhere else.

Key Takeaways

• Many big-box stores like Costo sell diamond jewelry.
• Costco does not offer cleaning or repair services for its jewelry.
• The most expensive ring as of February 2025 is $320,000, but there are much more affordable prices.
• Unlike a store like Tiffany & Co., you cannot have a ring sized to fit, as they are premade items.

Understanding the 4Cs

Most jewelry retailers use the Gemological Institute of America (GIA) color, clarity, cut, and carat weight standards, also known as the 4Cs, to set stones’ prices. The rating for these characteristics determines the quality of a diamond. The cut is a matter of personal taste, but the quality of the cut matters to its brilliance.

Clarity is a measure of the stone’s purity, with designations like VVS1, or very, very slightly included, and VS1, for very slightly included. Color is rated on a scale of D to Z, with D being the best, or colorless, quality.

Costco guarantees that the diamonds it sells are at least VS2 in clarity and grade I in color. Its diamond rings with a center stone that is 1.00-carat or larger come with a GIA Diamond Grading Report. Diamonds over one carat come with a gemological/jewelry report that can be used for an insurance appraisal of the fine jewelry investment.

Important

Shoppers who go to Tiffany & Co. don’t have to make sense of technical reports independently.

Tiffany & Co. offers consultations during the shopping process with diamond experts in-store, by phone, or by email.

Diamond Price Ranges

A one-carat or more diamond ring can sell for anywhere between $3,500 and $40,000, depending on those 4Cs, the setting’s quality, and the retailer.

As of February 2025, the Costco website lists rings starting at $599.97 for a double-row band in 14k white gold with a 0.70-carat VS2 diamond. The priciest offering at this writing is a $319,999.99 ring set in platinum with a 1.54-carat pink diamond rated with VVS1 clarity.

For comparison, a solitaire diamond ring at Tiffany & Co. starts at $15,800, with many customizable options for size, color, and setting. Many of the rings displayed on its website are embellished with diamonds, often clustered with other stones.

Online diamond retailer Blue Nile Inc. sells loose diamonds and preset diamond rings and lists one-carat stones starting at $3,050. Blue Nile shoppers can choose from several setting styles for the diamond that they select at an additional cost. It uses the GIA rating system.

Customization and Service

Old-fashioned jewelry stores allow customers to customize their purchases. If you like a stone in one ring but the setting of another, many jewelers will make a custom version for you. Some even allow you to design your own ring and will work with you to produce a one-of-a-kind ring based on your description.

When you purchase a ring from a traditional jeweler, you can generally take it back when it needs cleaning or repairs or even have a gemstone reset in a new piece of jewelry.

All Costco diamond rings are premade, and buyers don’t have the option to customize them. The specifications on the Costco website list ring sizes, but you will have to take your ring to a jeweler if you need to have it sized to fit.

Costco does not offer cleaning or repairs for its jewelry.

Tiffany vs. Costco

In August 2017, a federal judge ruled Costco owed Tiffany at least $19.4 million in damages, lost sales, and interest for selling rings falsely advertised as Tiffany jewelry. The trial followed a 2015 verdict against Costco in the U.S. District Court in Manhattan. A jury determined the company was guilty of trademark infringement for using Tiffany to describe rings in its jewelry cases. Costco had argued that Tiffany was a generic term used to describe a style of ring setting.

If nothing else, that notorious case suggests that a consumer considering fine jewelry should know the basics before buying fine jewelry.

What Is Costco?

Costco Wholesale Corp. is a big-box retailer and a wholesale warehouse club operating 897 locations in North America, Asia, and Europe. It also has a major ecommerce operation. The company’s warehouses offer low prices on a limited selection of both name-brand and private-label products, typically offered in bulk volumes.

What Is Tiffany & Co.?

Tiffany & Co. was founded by Charles Lewis Tiffany in New York City in 1837. It started as a stationery store and eventually expanded to a leading global design house with a reputation for innovative jewelry design and expert craftsmanship. The company offers necklaces, bracelets, earrings, rings, and watches, as well as a variety of home accessories and fragrances. It was acquired in 2021 by the French luxury conglomerate Moët Hennessy Louis Vuitton SE, referred to as LVMH or Louis Vuitton.

What Is Blue Nile?

Blue Nile is a prominent online retailer specializing in selling certified diamonds and fine jewelry. It allows customers to purchase engagement rings, wedding bands, and other jewelry pieces directly through its website, often at lower prices than traditional brick-and-mortar jewelers.

Is There a Best Time of Year to Buy Diamond Rings?

Most experts say the post-holiday season, particularly in January and February, is the best time of year to buy diamond rings. This is because demand is lower and retailers often offer sales to clear out leftover inventory from the busy holiday season. Other good times include around Presidents Day weekend in February, when further discounts may be available, and August, which is considered an off-peak month for engagement proposals.

The Bottom Line

Costco and many other big-box retailers sell diamond jewelry. Costco guarantees that the diamonds it sells are at least VS2 in clarity and grade I in color. While its most affordable diamond ring was about $600 as of February 2025, keep in mind that Costco does not offer cleaning or repair services for its jewelry and that you cannot have a ring sized to fit.