Performance Drag

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.

BREAKING DOWN '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. Round Trip Transaction Costs

    All costs associated with opening and closing a financial or ...
  2. Commission

    A service charge assessed by a broker or investment advisor in ...
  3. Brokerage Company

    A business whose main responsibility is to be an intermediary ...
  4. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
  5. May Day

    Refers to May 1, 1975, when brokerages changed from a fixed commission ...
  6. Hard Dollars

    Cash fees or payments made by an investor or customer to a brokerage ...
Related Articles
  1. Options & Futures

    OptionsXpress - Brokerage Review – Fee Structure And Tools

    Commission / Fee StructureLike many brokerages, commissions at optionsXpress are based in part on the magnitude and volume of an investor's business. Those investors who conduct more than 35 ...
  2. Trading Strategies

    Disadvantages of Pairs Trading

    Aside from the risks associated with pairs trading, there are a number of disadvantages to this investment technique of which traders should be aware. Perhaps the most obvious disadvantage is ...
  3. Mutual Funds & ETFs

    ETFs Vs Index Funds: Quantifying The Differences

    When it comes to the ability to track the performance of an index, exchange-traded funds and index funds each have certain advantages.
  4. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  5. Your Practice

    How Brokers Are Compensated for Selling Bonds

    Find out how brokers are paid for selling bonds and how the transaction costs are passed on to the investor through a markup or commission.
  6. Forex Education

    The 3 Biggest Risks Faced By International Investors

    Investing internationally is a great way to diversify your portfolio, but you need to know the risks.
  7. Options & Futures

    Don't Let Brokerage Fees Undermine Your Returns

    Smart investors don't give away more money than necessary in commissions and fees. Find out how to save.
  8. Forex Education

    How To Pay Your Forex Broker

    Three types of commissions are used in this market. Learn how to get the best deal.
  9. Stock Analysis

    The Hidden Costs of ETF Investing

    One of the most appealing features of exchange-traded funds–aside from the ability to tap into a large variety of asset classes–has been their lower costs. Compared to regular mutual ...
  10. Retirement

    The Hidden Costs Of Investing In Mutual Funds

    Find the hidden fees in your portfolio, so that you can increase your rate of return.
RELATED FAQS
  1. What's the smallest number of shares I can buy?

    Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number ... Read Answer >>
  2. How much money do I need to start trading?

    The step toward becoming an active trader is a big one, because the world of active trading is quite different from that ... Read Answer >>
  3. What number of shares determines adequate liquidity for a stock?

    Liquidity refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought stock ... Read Answer >>
  4. What types of stocks have a small difference between bid and ask prices?

    Learn more about bid-ask spreads and why stocks with high levels of liquidity and low levels of volatility usually have narrow ... Read Answer >>
  5. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  6. What does the Daily Average Revenue Trade (DART) tell me about a brokerage?

    A decline in a brokerage firm’s DARTs is not necessarily a cause for alarm, but you need to understand the factors behind ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center