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.

BREAKING DOWN '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.

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