Friction Cost

AAA

DEFINITION of 'Friction Cost'

The direct and indirect costs associated with the execution of financial transactions. Friction costs include the commissions and fees, interest rates, research time (opportunity costs), loan origination fees, tax implications and the time value of money associated with the transaction. A transaction's friction costs include all of the expenses associated with the transaction. The friction costs associated with a trade might include the actual cost of the shares, as well as broker commissions, exchange fees and tax liability on any earnings.

INVESTOPEDIA EXPLAINS 'Friction Cost'

A student loan, for example, might incur several expenses in addition to the principal of the loan. Interest rates must be considered, as well as loan origination fees, a federal default fee, other application fees, and the time and research invested. Looking at the friction cost for a transaction gives a more comprehensive view of the expenses associated with the transaction.

RELATED TERMS
  1. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
  2. Commission

    A service charge assessed by a broker or investment advisor in ...
  3. Time Value of Money - TVM

    The idea that money available at the present time is worth more ...
  4. Transaction Costs

    Expenses incurred when buying or selling securities. Transaction ...
  5. Operational Efficiency

    A market condition that exists when participants can execute ...
  6. Free Application For Federal Student ...

    The form that must be completed in order to qualify for any type ...
Related Articles
  1. Understanding The Time Value Of Money
    Investing Basics

    Understanding The Time Value Of Money

  2. Benchmark Your Returns With Indexes
    Mutual Funds & ETFs

    Benchmark Your Returns With Indexes

  3. Don't Let Brokerage Fees Undermine Your ...
    Options & Futures

    Don't Let Brokerage Fees Undermine Your ...

  4. How Our Borrowing Habits Have Changed ...
    Credit & Loans

    How Our Borrowing Habits Have Changed ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center