investment

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.

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Margaret James

Most entrepreneurs are risk-takers by nature, or at minimum calculated visionaries with a clear plan of action to launch a new product or service to fill a gap in the industry. On a personal level, many entrepreneurs take big risks to leave stable jobs to throw their efforts (and sometimes their own money) into launching a business.

For entrepreneurs, there is no guaranteed monthly income, no guarantee of success, and spending time with family and friends can be a challenge in the early days of launching a company. Here are some of the most common risks that every entrepreneur and investor should evaluate and minimize before starting a business.

Key Takeaways

• Entrepreneurs face multiple risks such as bankruptcy risk, financial risk, competitive risks, environmental risks, reputational risks, and political and economic risks.
• Entrepreneurs must plan wisely in terms of budgeting and show investors that they are considering risks by creating a realistic business plan.
• Entrepreneurs should also consider technology changes as a risk factor.
• Market demand is unpredictable as consumer trends can change rapidly, creating problems for entrepreneurs.

Financial Risk

An entrepreneur will need funds to launch a business either in the form of loans from investors, their own savings, or funds from family. The founder will have to put their own “skin in the game.” Any new business should have a financial plan within the overall business plan showing income projections, how much cash will be required to break even, and the expected return for investors in the first five-year time frame. Failure to accurately plan could mean that the entrepreneur risks bankruptcy, and investors get nothing.

Important

Entrepreneurs face many risks when they launch a venture, and they should take measures to insure against those that are most likely to affect them.

Strategic Risk

An impressive business plan will appeal to investors. However, we live in a dynamic and fast-paced world where strategies can become outdated quickly. Changes in the market or the business environment can mean that a chosen strategy is the wrong one, and a company might struggle to reach its benchmarks and key performance indicators (KPIs). 

Technology Risk 

New technologies are constantly emerging, particularly in the era of the Fourth Industrial Revolution. Some of these changes are characterized as “paradigm shifts” or “disruptive” technologies. To be competitive, a new company may have to invest heavily in new systems and processes, which could drastically affect the bottom line.

Market Risk

Many factors can affect the market for a product or service. The ups and downs of the economy and new market trends pose a risk to new businesses, and a certain product might be popular one year but not the next. For example, if the economy slumps, people are less inclined to buy luxury products or nonessentials. If a competitor launches a similar product at a lower price, the competitor might steal market share. Entrepreneurs should perform a market analysis that assesses market factors, the demand for a product or service, and customer behavior.

Competitive Risk 

An entrepreneur should always be aware of its competitors. If there are no competitors at all, this could indicate that there is no demand for a product. If there are a few larger competitors, the market might be saturated, or the company might struggle to compete. Additionally, entrepreneurs with new ideas and innovations should protect intellectual property by seeking patents to protect themselves from competitors.

Reputational Risk

A business’s reputation is everything, and this can be particularly so when a new business is launched and customers have preconceived expectations. If a new company disappoints consumers in the initial stages, it may never gain traction. Social media plays a huge role in business reputation and word-of-mouth marketing. One tweet or negative post from a disgruntled customer can lead to huge losses in revenue. Reputational risk can be managed with a strategy that communicates product information and builds relationships with consumers and other stakeholders.

Environmental, Political, and Economic Risk 

Some things cannot be controlled by a good business plan or the right insurance. Earthquakes, tornadoes, hurricanes, wars, and recessions are all risks that companies and new entrepreneurs may face. There may be a strong market for a product in an underdeveloped country, but these countries can be unstable and unsafe, or logistics, tax rates, or tariffs might make trade difficult depending on the political climate at any point in time.

Also, some business sectors have historically high failure rates, and entrepreneurs in these sectors may find it difficult to find investors. These sectors include food service, retail, and consulting.

59.2%

The percentage of small businesses launched in March 2021 that made it to their third anniversary, the most recent three-year data available, according to the U.S. Bureau of Labor Statistics.

What Is an Entrepreneur?

An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The process of setting up a business is known as entrepreneurship.

What Role Do Entrepreneurs Play in an Economy?

Entrepreneurs play a key role in any economy, using the skills and initiative necessary to anticipate needs and bring new ideas to market. Entrepreneurship that proves to be successful in taking on the risks of creating a startup is rewarded with profits and growth opportunities.

What Is Risk?

For an entrepreneur, risk is the potential for financial loss or failure when starting a new business. For the entrepreneur’s investors, risk is the chance that their investment’s actual gains will differ from an expected return—including the possibility of losing some or all of the investment.

The Bottom Line

The U.S. Bureau of Labor Statistics found that of the small businesses that were started in March 2021, 79.1% made it to their first anniversary (2022), 67% made it to their second anniversary (2023), and 59.2% made it to their third anniversary (2024). Entrepreneurs should expect to make some mistakes, some of which will be costly. However, with the right planning, funding, and flexibility, businesses have a better chance of succeeding.

Fact checked by Pete Rathburn
Reviewed by JeFreda R. Brown

Buy-Side Analyst vs. Sell-Side Analyst: An Overview

The main differences between these two types of analysts are the kind of firm that employs them and the people for whom they make investment recommendations.

A buy-side analyst usually works for an institutional investor such as a hedge fund, pension fund, actively managed mutual fund, or some other type of asset management firm. They conduct investment research and analysis so that they can recommend securities that their own company can invest in.

A sell-side analyst works for an investment bank, a brokerage, a commercial bank, or other firm that promotes and sells securities, and manages individual accounts. The sell-side analyst makes investment recommendations to the clients of the firm.

Key Takeaways

• The main differences between buy-side and sell-side analysts are the type of firm that employs them and the people to whom they make recommendations.
• Investment banks, market makers, and broker-dealers are typical sell-side firms. They sell investment services to the rest of the market.
• Buy-side firms are asset managers such as hedge funds, actively managed mutual funds, and other firms that invest in securities that they manage for others.
• Buy-side analysts will determine how promising an investment seems and how well it coincides with their company’s investment strategy.
• Sell-side analysts issue the often-heard recommendations of “strong buy,” “outperform,” “neutral,” or “sell.”

Buy-Side Analyst

Recommends Investments for Their Own Firm

Buy-side analysts conduct research and analysis to determine how promising an investment seems and how well it coincides with the investment strategy of their firm.

To simplify the explanation, let’s say that this firm is an actively managed mutual fund.

The buy-side analyst’s recommendations, made exclusively for the benefit of the fund that employs them, are not available to anyone outside of the fund.

If a fund employs an analyst who makes successful recommendations, it does not want competing funds to have access to the same advice.

A buy-side analyst’s success or talent is determined by the number of profitable recommendations they make.

A buy-side analyst is much more concerned about being right than a sell-side analyst is. In fact, avoiding the negative is often a key part of the buy-side analyst’s job.

Many analysts pursue their job with the mindset of figuring out what can go wrong with an idea.

Broad Coverage

Buy-side analysts, in general, have broad coverage responsibilities. It is not uncommon for funds to have analysts covering the entire technology sector or industrials sector.

Many sell-side firms assign several analysts to cover particular industries within those sectors (like software, semiconductors, etc.).

Typically, there are more job opportunities for sell-side analysts because of the focus their firms place on sales.

Sell-Side Analyst

Recommends Investments for the Clients of Their Firm

Sell-side analysts are those who issue the often-heard recommendations of “strong buy,” “outperform,” “neutral,” or “sell” for the benefit of individual investors and other clients of the firms they work for.

These recommendations, and the research behind them, help clients of their firm make decisions to buy or sell securities, such as stocks or bonds.

A Focus on External Sales

For a brokerage, the sell-side analyst plays an important role because every time a client decides to place a trade, the brokerage gets a commission or charges some other transaction fee.

Another job of a sell-side analyst is to convince institutional accounts (e.g., buy-side firms) to direct their orders through the trading desk of the sell-side analyst’s firm.

To capture trading revenue, the sell-side analyst must be seen by the buy-side firm as providing valuable services, such as research. Some analysts will constantly hunt for new information or proprietary angles on the industry.

This is not to say that sell-side analysts recommend or change their opinion on a stock just to create transactions. However, it is important to realize that these analysts are paid by and ultimately answer to the brokerage, not the clients.

Furthermore, the recommendations of a sell-side analyst are called “blanket recommendations,” because they’re not directed at any one client, but rather at the general mass of the firm’s clients.

These recommendations are inherently broad and, as a result, they may be inappropriate for certain investment strategies. So if you consider a sell-side recommendation, make sure that it suits your individual investment style and goals.

Note

Buy-side firms can be the clients of sell-side firms. Sell-side analysts provide buy-side clients with the results of their research and analysis.

Key Differences

While buy-side and sell-side analysts are both responsible for performing investment research, the two positions have different, but important, roles in the financial markets.

Think of them as two sides of the financial markets coin. Buy-side analysts work for asset management firms that invest in large amounts of investments. Sell-side analysts work for firms that promote and sell investments to the public.

In addition, sell-side firms, such as brokerages and investment bankers, provide market services to other market participants. As registered members of the various stock exchanges, they act as market makers and provide trading services for their clients in exchange for a commission or spread on each trade.

Furthermore, sell-side firms can offer underwriting services, helping to launch IPOs and bond issuances for the rest of the market. And, they produce research for the consumption of buy-side firms.

It’s possible for one company, such as a large bank, to have both buy-side and sell-side aspects. To avoid potential conflicts of interest, these companies must enact Chinese wall policies to separate the two types of departments.

While sell-side analysts create investment research products for sale to other companies, buy-side analysts conduct in-house research intended only for their own firms.

Special Considerations

Sell-side analysts have a more public-facing role than those on the buy side. Because their work is consumed by outside companies, sell-side analysts must also form business relationships, attracting and advising new clients.

Buy-side analysts have more inward-facing duties. They suggest investments and help their firms manage client money. They do their best to help grow the value of their firm’s portfolio.

Buy-Side Analyst vs. Sell-Side Analyst Example

Imagine the interactions between two hypothetical firms. Asset Manager A is a buy-side firm that manages a portfolio of securities on behalf of its clients. Broker B is a sell-side firm that provides market services, such as access to the stock exchange.

Both firms employ analysts. But they have different roles. Broker B’s analysts generally produce market research for sale to buy-side firms, such as Manager A.

They evaluate different public companies, conduct technical and fundamental analysis, and deliver research to their clients with a “buy” or “sell” recommendation.

On the buy-side, Asset Manager A’s analysts will conduct their own research and compare their findings with paid research, such as that produced by Broker B.

Manager A’s buy-side analyst’s research is intended for internal consumption only, rather than for sale to other firms. Based on the buy-side analyst’s recommendations, the asset manager will buy, sell, or hold positions in various securities in anticipation of future profits.

Is Goldman Sachs Buy-Side or Sell-Side?

As one of the largest investment banks, Goldman Sachs is largely on the sell-side of the market, providing liquidity and execution for institutional investors. However, Goldman Sachs also has some buy-side arms, such as Goldman Sachs Asset Management. In order to prevent conflicts of interest between the buy-side and sell-side, the two bodies are separated by a Chinese wall policy.

Is Private Equity Buy-Side or Sell-Side?

Because private equity funds make money by buying and selling securities, they are considered to be buy-side. Like hedge funds, pension funds, and other asset managers, they invest on behalf of their clients and make profits when those assets deliver returns.

How Much Do Buy-Side Analysts Make?

According to ZipRecruiter, the average salary for a buy-side analyst is about $76,273 per year, as of February 2025. However, this figure does not account for bonuses or non-salary benefits, which can be considerable. Salary also varies by city, firm, and how many years of experience an analyst may have.

Is BlackRock Buy-Side or Sell-Side?

Because BlackRock’s business model consists largely of investing on behalf of its clients, it is considered a buy-side firm. It is the largest investment manager in the world, with $11.6 trillion in assets under management.

The Bottom Line

Buy-side analysts and sell-side analysts both handle research, analysis, and investment recommendation duties, but for companies on either side of the financial markets.

Buy-side analysts recommend investments to the managers of their own firms. These firms include hedge funds, pension funds, actively managed mutual funds, or other kind of asset manager that buys and manages large amounts of securities.

Sell-side analysts recommend investments to the clients of their firms, which typically are brokerages, investment banking firms, and large banks that promote and sell investments to the public.