Transaction Costs

Loading the player...

What are 'Transaction Costs'

Transaction costs are 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.

RELATED TERMS
  1. Round Trip Transaction Costs

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

    A slang phrase used when a broker earns commissions from both ...
  3. Friction Cost

    The direct and indirect costs associated with the execution of ...
  4. Authorization Only

    A type of sale transaction that creates a pending transaction ...
  5. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
Related Articles
  1. Investing

    What Are Transaction Costs?

    Transaction costs are expenses incurred from buying or selling securities.
  2. Managing Wealth

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  3. Financial Advisor

    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.
  4. Personal Finance

    How Real Estate Agents Get Paid

    Most real estate agents are paid a percentage of the property’s selling price, which is called a commission.
  5. Investing

    How Do Real Estate Agents Get Paid?

    Here's how real estate commissions on home sales really work. And, yes, they're negotiable.
  6. 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.
  7. Financial Advisor

    How Fees and Taxes Can Consume Your Nest Egg

    The challenges of saving for retirement are many; high fees, excessive fund costs and the impact of taxes can really add up. Here's what you need to know.
  8. Financial Advisor

    Investment Fees: How to Understand Them

    There can be a variety of fees levied when investing. Here's a look at what they are and how to manage them.
  9. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  10. Personal Finance

    How Foreign Transaction Fees Work

    Using a credit card when you travel can be costly. Here's what you need to know about foreign transaction fees – plus tips on making purchases abroad.
RELATED FAQS
  1. What are the fees associated with opening a brokerage account?

    I'm a new investor looking to open a brokerage account. I was wondering if I have to worry about any other service charges ... Read Answer >>
  2. How are arm's-length transactions determined by law?

    Determine if transactions are conducted at arm's length by checking if the parties to a contract are independent and transact ... Read Answer >>
  3. When does vertical integration reduce transaction costs?

    Trading is not just based on supply and demand, but negotiations between companies. Vertical integration can eliminate this ... Read Answer >>
  4. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
  5. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  6. Are arm's length transactions always better than transactions not at arm's length?

    Transactions not at arm's length have real tax and other consequences for individuals and businesses, but they are not necessarily ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center