Transaction Costs

DEFINITION of 'Transaction Costs'

Expenses incurred when buying or selling securities. Transaction costs include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price the buyer pays). The transaction costs to buyers and sellers are the payments that banks and brokers receive for their roles in these transactions. There are also transaction costs in buying and selling real estate. These fees include the agent's commission and closing costs such as title search fees, appraisal fees and government fees.

BREAKING DOWN 'Transaction Costs'

Transaction costs are important to investors because they are one of the key determinants of net returns. Transaction costs diminish returns, and over time, high transaction costs can mean thousands of dollars lost from not just the costs themselves but because the costs reduce the amount of capital available to invest. Fees, such as mutual fund expense ratios, have the same effect. Different asset classes have different ranges of standard transaction costs and fees. All else being equal, investors should select assets whose costs are at the low end of the range for their type.

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