Performance Drag

AAA

DEFINITION of 'Performance Drag'

The negative effect of transaction costs on the performance of an investment. Performance drag is most commonly attributed to brokerage commissions, but there are many other factors such as timing, bid-ask spreads and other opportunity costs that can cause the return of an investment to lag behind the return seen in the market.

INVESTOPEDIA EXPLAINS 'Performance Drag'

For many traders, the actual return of an asset is sharply different than what would be recognized if all transaction costs were removed. For example, let's assume an investor pays $30 in brokerage commissions (per order) to hold 100 shares of ABC Company at an entry price of $24 per share. In this case, the investor needs the stock's price to rise 2.5% so that he or she can recover the commissions paid to be in the trade (a $0.60 rise on 100 shares will equal the $60 that the investor needs to recoup the commissions. Given the $24 stock price, this is equal to 2.5%) The 2.5% cost of the transaction will cause the investor's position to drag behind the change in the price of the asset.

RELATED TERMS
  1. Spread

    1. The difference between the bid and the ask price of a security ...
  2. Commission

    A service charge assessed by a broker or investment advisor in ...
  3. Reinvoicing Center

    A subsidiary or department of a multinational corporation where ...
  4. Foregone Earnings

    The difference in earnings or performance between what is actually ...
  5. Market Timing

    1. The act of attempting to predict the future direction of the ...
  6. Opportunity Cost

    1. The cost of an alternative that must be forgone in order to ...
RELATED FAQS
  1. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  2. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
  3. What does the rule of 70 indicate about a country's future economic growth?

    The rule of 70 could be used to indicate the approximate number of years that it would take a company's economic growth to ... Read Full Answer >>
  4. How is the rule of 70 related to the growth rate of a variable?

    The rule of 70 is related to the growth rate of a variable because it uses the growth rate in its approximation of the number ... Read Full Answer >>
  5. How does the risk of investing in the aerospace sector compare to the broader market?

    Investing in the aerospace sector is riskier than investing in the broader market. The most accurate measure of sector volatility, ... Read Full Answer >>
  6. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Benchmark Your Returns With Indexes

    If your portfolio is always falling short, you may not be making an apples-to-apples comparison.
  2. Personal Finance

    Revive Your Portfolio

    Increase your annual returns by rebalancing your investments now.
  3. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify Your Portfolio

    Seeking low cost diversification to high quality stocks and bonds? Consider these 4 ETFs.
  4. Bonds & Fixed Income

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  5. Mutual Funds & ETFs

    Mutual Funds or ETFs: Which is Better?

    Trying to decide between a mutual fund or ETF? Here's what you need to know.
  6. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  7. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  8. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.
  9. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  10. Investing

    Financial Gifts For Grads: Kindergarten To College

    If you really want to help your grad preparing for the future, consider a present that supports their long-term goals—an early start to financial planning.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center